Loss Limitations Analysis: Basis, At-Risk, Passive, and NOLs

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, October 27, 2022

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Course Materials

This course will discuss the hierarchy of basis, at-risk, passive activity loss (PAL) limitations, net operating loss (NOL) limitations, and steps to avoid and mitigate the limitation of losses for owners of partnerships and S corporations.

Description

A multitude of limitations exist to delay the deduction of losses by taxpayers. Although most aim to prevent taxpayers' manipulation of losses, there are times when legitimate transactions result in nondeductible losses. Separating these allowed/deductible and unallowed/carried forward losses is complex.

Section 704(d) dictates that partnership losses exceeding basis at year-end must be suspended. The mirror provision for S corporations, Section 1366(d), states that shareholder losses are limited to the shareholder's adjusted basis in the stock plus his loans to the corporation. Excess losses are carried forward indefinitely. Although similar to basis limitations, Section 465 at-risk rules further limit losses requiring that the taxpayer be "at-risk" or personally liable for the amounts claimed as losses. The extent of this personal liability obligation is interpreted differently for shareholders and partners, adding further complications.

A deductible loss must pass through yet another hurdle--the PALs under Section 469. PALs are limited to the amount of passive income reported, so identifying passive income is critical. Understanding the interaction of basis, at-risk, passive, and NOLs is essential for tax practitioners looking to maximize loss deductions for taxpayers.

Listen as our panel of tax experts discusses the interplay of the many restrictions on loss deductions, including structuring opportunities to maximize the amount currently deductible.

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Outline

  1. Basis
  2. At-risk limitations
  3. Passive loss limitations
  4. Net operating losses
  5. Section 461(l) Excess business loss limitation
  6. Planning opportunities

Benefits

The panel will review these and other notable issues:

  • The appropriate hierarchy for application of loss limitations
  • What constitutes amounts at risk for partnerships and S corporations
  • How can activities be aggregated to avoid PAL limitations?
  • When losses are carried forward, and how are losses applied to different types of income?

Faculty

Hadwen, John
John Hadwen, CPA
Tax Director
Albin Randall & Bennett

Mr. Hadwen joined ARB in 2021. He is a Director specializing in providing comprehensive tax compliance and tax...  |  Read More

Smeltzer, Joshua
Joshua D. Smeltzer
Partner-Elect
Gray Reed & McGraw

Mr. Smeltzer is a tax litigator defending clients in tax audits, tax appeals, and litigation in Federal District Court,...  |  Read More

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