With one year of the Tax Cuts and Jobs Act (TCJA) behind us, many taxpayers are beginning to see more clearly how the reform is affecting their businesses and finances. Even though the 2018 tax year is closed and filed, aspects from last year can still affect your 2019 taxes through new carryovers set in place by the reform.
Business Interest Expense
One aspect of the TCJA that affected many business owners was the limitation on the deduction for business interest expense. For 2019, business owners need to consider the amount of business interest expense that was disallowed in 2018. Interest expense will carryforward indefinitely and potentially can be used as an expense in the next taxable year as long as the current year interest expense is not limited. For corporations, excess business interest expense is carried forward at the corporate level. For a pass-through entity, excess business interest expense is carried forward at the partner level. Excess business interest expense can be deducted to the extent that there is excess business interest income or excess taxable income in the current year. Excess taxable income is any income over the amount necessary for the entity to deduct the current year business interest. Specifically, for partners, the excess business interest income or excess taxable income must be allocated from the same partnership in which the excess business interest expense was originally disallowed.
Qualified Business Income
While most taxpayers saw a benefit from the qualified business income (QBI) deduction, there were many taxpayers who showed losses for 2018 and thus will be subject to QBI deduction limitations in 2019. Any losses from a qualified business will reduce the income from other qualified businesses during the year resulting in a decreased QBI deduction. If the outcome of this results in a net loss for QBI purposes, then the loss will be carried forward to the following year and will decrease the amount of the QBI deduction you can claim on your tax return.
Net Operating Loss
The deductibility of ordinary business losses has also changed under the TCJA. Non-corporate taxpayers with losses may have been subject to the excess business loss limitations in 2018 if their net losses from business activities were more than $250,000 for single filers and $500,000 for joint filers. Taxpayers may carryforward these losses to future years as a net operating loss (NOL). The TCJA has also enacted changes to NOLs. NOLs will only be deductible up to 80% of a taxpayer's taxable income but can be carried forward indefinitely. However, the carryback provision that applied to NOL's created prior to 2018 is no longer available.We recommended that you reach out to your tax advisor to discuss how the tax reform will affect your specific situation.