To a tax accountant, October 15
signifies the extended due date for individual tax returns.
As a generalization, our most
complicated returns go on extension. There is a reason: it is likely that the
information necessary to prepare the return is not yet available. For example,
you are waiting on a Schedule K-1 from a partnership, LLC or S corporation. That
K-1 might not be prepared until after April 15. There is only so much work an
office of accountants can generate within 75 days, irrespective of government diktats.
More recently I am also seeing
personal returns being extended because we are expecting a broker’s information
report to be revised and perhaps revised again. It happens repetitively.
Let’s talk about a new twist for 2018
personal returns. There are a few twists, actually, but let’s focus on the
“excess business loss” rule.
First, this applies only to
noncorporate taxpayers. As noncorporate taxpayers, that could be you or me.
Its purpose is to stop you or me from
claiming losses past a certain amount.
Now think about this for a moment.
Go out there, sign a sports contract
for big bucks and Uncle Sam is draped all over you like a childhood best
friend.
Get booted from the league, however,
and you get a very different response.
How can losses happen?
Easy. Let me give you an example. We
represent a sizeable contractor. The swing in their numbers from year-to-year can
gray your hair. When times are good, they are virtually printing money. When
times are bad, it feels like they are taking-on the national debt.
I presume one does not even know the
meaning of risk if one wants to be an owner there.
To me, fairness requires that the tax
law share in my misery when I am losing money if it also wants me to
cooperatively send taxes when I am making money. Call me old-fashioned that way.
The “excess business loss” rule is not
concerned with old-fashioned fairness.
Let’s use some numbers to make sense
of this.
Capital gains 400,000
Schedule K-1 (600,000)
The concept is that you can offset a business loss against
nonbusiness income, but only up to a point. That point is $250,000 if you are
nonmarried and twice that if you are. Using the above numbers, we have:
Dividends 100,000
Capital
gains 400,000
Schedule
K-1 (600,000)
(100,000)
Excess
business loss 100,000
Interest, dividends and capital gains are the classic
nonbusiness income categories. You are allowed to offset $500,000 of
nonbusiness income (assuming married) but you are showing $600,000 of business losses.
The excess business loss rule will magically adjust $100,000 into your income tax
return to get the numbers to work.
It is like a Penn and Teller show.
Let’s tweak our example:
Wages 100,000
Dividends 100,000
Capital
gains 400,000
Schedule
K-1 (600,000)
What now? Do you get to include that
W-2 as part of your business income, meaning that you no longer have a $100,000
excess business loss?
Believe it or not, tax professionals
are not certain.
Here is what sets up the issue:
The Joint Committee of Taxation published
its “Bluebook” describing Congress’ intention when drafting the Tax Cuts and
Jobs Act. In it, the JCT states that “an excess business loss … does not take
into account gross income, or gains or deductions attributable to the trade or
business of performing services as an employee.”
The “trade or business of performing services
as an employee” is fancy talk for wages and salaries.
However, the IRS came out with a shiny
new tax form for the excess business loss calculation. The instructions
indicate that one should add-up all business income, including wages and tips.
We have two different answers.
Let’s get nerdy, as it matters here.
Elsewhere in the Code, we also have a
new 20% deduction for “qualified business income.” The Code has to define
“business income,” as that is the way tax law works. The Code does so by
explicitly excluding the trade or business of “being an employee.”
There is a concept of statutory
construction that comes into play. If one Code section has to EXPLICITLY
exclude wages (that is, the trade or business of being an employee), then it is
reasonably presumable that business income includes wages.
Which means foul when another Code
section pops up and says “No, it does not.”
Of course, no one will know for
certain until a court decides.
Or Congress defies all reasonable
expectations and actually works rather than enable the Dunning-Kruger psychopaths
currently housed there.
Why does this “excess business loss” Code
section even exist?
Think $150 billion in taxes over 10
years. That is why.
To be fair, the excess is not lost.
It carries over to the following year as a net operating loss.
That probably means little if you
have just lost your shirt and I am calling you to make an extension payment on
April 15 – you know, because of that “excess business loss” thing.
Meanwhile tax professionals have to
march on. We cannot wait. After all, those noncorporate returns are due October
15.