Tax Cuts And Jobs Act

The 2017 Tax Cuts and Jobs Act (TCJA) impacted investors, traders, and individuals positively and negatively, beginning in the tax year 2018. In this chapter, we explore TCJA’s impact on these groups. 

The 2020 pandemic relief CARES Act overrode many TCJA rules for 2018, 2019, and 2020, and TCJA returned in force for 2021.

QUALIFIED BUSINESS INCOME DEDUCTION

TCJA introduced a new tax deduction for pass-through businesses, including sole proprietors, partnerships, and S-Corps. Subject to haircuts and limitations, a pass-through business could be eligible for a 20% deduction on qualified business income (QBI). 

Traders eligible for TTS are a “specified service trade or business” (SSTB) activity, which means if their taxable income is above an income cap, they won’t receive a QBI deduction. The taxable income (TI) cap is $464,200/$232,100 (married/other taxpayers) for 2023 and $483,900/$241,950 (married/other taxpayers) for 2024. The phase-out range below the cap is $100,000/$50,000 (married/other taxpayers), in which the QBI deduction phases out for SSTB. The W-2 wage and property basis limitations apply within the phase-out range. Investment managers are also SSTB. 

QBI for traders includes Section 475 ordinary income and loss and trading business expenses. QBI excludes capital gains and losses, Section 988 forex ordinary income or loss, dividends, and interest income. 

TCJA favors non-service businesses, which are not subject to an income cap. The W-2 wage and property basis limitations apply above the TI threshold of $364,200/$182,100 (married/other taxpayers) for 2023 and $383,900/$191,950 (married/other taxpayers) for 2024. The IRS adjusts the annual TI threshold for inflation each year. 

Sole proprietor TTS traders cannot pay themselves wages and likely cannot use the phase-out range. (See more on QBI in chapter 9.)

EXCESS BUSINESS LOSSES AND NET OPERATING LOSSES

TCJA introduced the “excess business loss” (EBL) limitation and revised the net operating loss (NOL) rules. TTS traders with Section 475 MTM, ordinary loss treatment, can generate EBL and NOL carryforwards. TTS traders without 475 have capital loss limitations. 

EBL can offset all types of income on a joint or single filing, whereas capital losses only offset capital gains. Plus, business expenses and ordinary trading losses comprise an NOL carryforward. Whether you are a trader or not in a carryforward year doesn’t matter. Business ordinary trading loss treatment is the most significant contributor to federal and state tax refunds for traders. 

TCJA repealed the two-year NOL carryback, except for certain farming losses and casualty and disaster insurance companies. TCJA carries forward NOLs indefinitely (20 years before the TCJA changes), and the deduction of NOLs is limited to 80% of the subsequent year’s taxable income.           

TCJA’s 2018 EBL limitation was $500,000 for married and $250,000 for other taxpayers. Add the losses above the EBL to an NOL carryforward. 

The inflation-adjusted EBL threshold for 2023 is $578,000 (for married)/$289,000 (for other taxpayers), and the 2024 EBL is $610,000 (for married)/$305,000 (for other taxpayers).

The 2020 CARES Act for COVID-19 relief suspended TCJA’s EBL rules for 2018, 2019, and 2020 and allowed five-year NOL carrybacks. Taxpayers could recalculate their NOLs without the EBL limitation and file an NOL carryback refund claim. For example, they could carry back a 2020 NOL to 2015 and an unused NOL to 2016 and subsequent years. TCJA’s NOL and EBL rules apply again in 2021 through 2025. Other recent tax acts extended EBL further to 2028. (See examples of EBL and NOL for Chapter 9.)

Excerpt from Green’s Trader Tax Guide Chapter 17 Tax Cuts and Jobs Act.