Surgent's Four Tiers of Loss Limitations: A Guide to the Rules for Pass-Through Entities (FTL4)

Overview

Owners of S corporations and partnerships are subject to numerous limitations on pass-through losses, each with unique rules, applications, and complexities. With the increase in popularity of pass-through business entities, it is essential for CPAs to understand the complexities and interactions of these pass-through loss limitations.

Prerequisites

Basic familiarity with loss allowance rules of pass-through entities

Objectives

• Analyze how basis in an ownership interest in a pass-through entity is established
• Discuss how activity of the entity, distributions, and optional adjustments increase or decrease basis
• Discuss when basis is “at risk” under Section 465, and the resulting loss disallowance and carryforward related to basis that is not at risk
• Define passive activities under section 469 and exceptions to the passive loss rules
• Discuss when and how aggregation of activities should be used to avoid the passive loss rules
• Analyze new §461(l) created by the Tax Cuts and Jobs Act of 2017 and understand the limitation calculation and resulting carryforward
• Analyze the hierarchy of the loss limitations with examples of the application of the four tiers of losses and how they interact

Highlights

• Tier 1: Basis limitations for S corporation shareholders and partners
• Tier 2: Section 465 at-risk limitations for S corporation shareholders and partners, including the impact of debt, indemnities, guarantees, and shareholder/partner agreements
• Tier 3: Section 469 passive loss limitations and exceptions to the limitations
• Tier 4: The new excess business loss limitation of the Tax Cuts and Jobs Act of 2017 (new Section 461(l))