461 Instructions for F461 Limitations on Business Losses

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2018

Department of the Treasury
Internal Revenue Service

Instructions for Form 461
Limitation on Business Losses

Definitions

DRAFT AS OF
September 27, 2018
Section references are to the Internal Revenue
Code unless otherwise noted.

General Instructions

Future Developments

For the latest information about
developments related to Form 461 and
its instructions, such as legislation
enacted after they were published, go to
IRS.gov/Form461.

Purpose of Form

The Tax Cuts and Jobs Act limited the
amount of losses from the trades or
businesses of noncorporate taxpayers
that the taxpayers can claim each year.
Taxpayers cannot deduct an excess
business loss (see Definitions below) in
the current year. However, the excess
business loss is treated as a net
operating loss (NOL) carryover. See
Pub. 536, Net Operating Losses (NOLs)
for Individuals, Estates, and Trusts, for
more information on NOL carryovers.
Use Form 461 to figure the excess
business loss. See Who Must File and
the instructions for Line 16 to find where
to report the excess business loss on
your return.

Who Must File

File Form 461 if you are a noncorporate
taxpayer and your net losses from all of
your trades or businesses are more than
$250,000 ($500,000 for married
taxpayers filing a joint return). See
Definitions below. Attach Form 461 to
the applicable tax return you file.
• Form 1040, U.S. Individual Income
Tax Return.
• Form 1040NR, U.S. Nonresident
Alien Income Tax Return.
• Form 1041, U.S. Income Tax Return
for Estates and Trusts.
• Form 1041-QFT, U.S. Income Tax
Return for Qualified Funeral Trusts.
• Form 1041-N, U.S. Income Tax
Return for Electing Alaska Native
Settlement Trusts.
• Form 990-T, Exempt Organization
Business Income Tax Return (and proxy
tax under section 6033(e)).

Excess business loss. An excess
business loss is the amount by which
the total deductions from your trades or
businesses are more than your total
gross income or gains from your trades
or businesses, plus the threshold
amount.

Threshold amount. For 2018, the
threshold amount is $250,000
($500,000 for married taxpayers filing a
joint return). These amounts are
indexed for inflation.

Trade or business. An activity
qualifies as a trade or business if your
primary purpose for engaging in the
activity is for income or profit and you
are involved in the activity with
continuity and regularity. The facts and
circumstances of each case determine if
an activity is a trade or business. The
regularity of activities and transactions
and the production of income are
important elements. You do not need to
actually make a profit to be in a trade or
business as long as you have a profit
motive. However, you do need to make
ongoing efforts to further the interests of
your business.

Ordering Rules

First apply the at-risk rules; next, apply
the passive activity loss rules; and then
apply the excess business loss rules.
See the Instructions for Form 6198, AtRisk Limitations. Also, see Pub. 925,
Passive Activity and At-Risk Rules.
Farming losses. Taxpayers with
losses from a farming business must
apply the excess business loss
limitation before carrying any net
operating losses back 2 years. See the
Instructions for Form 1045, Application
for Tentative Refund.
Farming and nonfarming losses. If
you incur both farming and nonfarming
business losses that are more than the
threshold amount (see Definitions
above), you must allocate the threshold
amount first to the farming losses to the
extent you have an NOL.

Transition Rules

If you had losses or deductions that
were limited under other provisions of

Sep 27, 2018

Cat. No. 71453Z

the Internal Revenue Code in prior tax
years, including, for example, excess
farm losses that were subject to section
461(j) in 2017, those losses or
deductions are included in figuring the
amount, if any, of your excess business
loss in 2018.

Additional Information

See the following publications for more
information about the items in these
instructions.
• Pub. 225, Farmer’s Tax Guide.
• Pub. 536, Net Operating Losses
(NOLs) for Individuals, Estates, and
Trusts.
• Pub. 925, Passive Activity and
At-Risk Rules.

Specific Instructions
Joint returns. Complete one Form 461
containing all the information for both
spouses.
Amended returns. Attach Form 461 to
any applicable amended returns.

Part I—Total Income/ Loss
Items
Use Part I to report all the income and
losses reflected on your applicable tax
return. If you are filing a return other
than Form 1040, see the instructions
below for the specific line that is an
equivalent to the line on Form 1040. If
the line instructions do not reference a
form listed under Who Must File, then it
is not applicable.

Line 1

Enter any wages, salaries, and tips
reported on line 1, Form 1040 or line 8,
Form 1040NR.

Line 2

Enter any business income or loss
reported on line 12, Schedule 1 (Form
1040); line 13, Form 1040NR; or line 3,
Form 1041.

Line 3

Enter any capital gains or losses
reported on line 13, Schedule 1 (Form
1040); line 14, Form 1040NR; line 4,
Form 1041; line 3, Form 1041-QFT;
line 3, Form 1041-N; or line 4, Form
990-T.

Line 4

through 8 above that is not from a trade
or business. See the definition of a trade
or business above. If you filed a tax
return other than a Form 1040, see the
specific line references for the tax return
in the specific line instructions in Part I.

Line 5

Although losses and deductions
are usually entered as negative
CAUTION figures on other forms or
worksheets, enter them as a positive
figure on this line.

Enter any other gains or losses reported
on line 14, Schedule 1 (Form 1040);
line 15, Form 1040NR; line 7, Form
1041; line 4, Form 1041-QFT; line 4,
Form 1041-N; or line 4, Form 990-T.

!

You will need to keep a record
of your excess business loss
RECORDS from each tax year since it is
treated as a net operating loss (NOL)
carryover. See Pub. 536, Net Operating
Losses (NOLs) for Individuals, Estates,
and Trusts, for more information on
NOL carryovers and reporting NOLs on
future tax year returns.

DRAFT AS OF
September 27, 2018
Enter any supplemental income or loss
reported on a Schedule E, such as
income from rental real estate, royalties,
partnerships, S corporations, estates,
trusts, REMICs, etc. This is reported on
line 17, Schedule 1 (Form 1040);
line 18, Form 1040NR; line 5, Form
1041; line 4, Form 1041-QFT; line 4,
Form 1041-N; or line 8, Form 990-T.

Line 6

Enter any farm income or loss reported
on line 18, Schedule 1 (Form 1040);
line 19, Form 1040NR; line 6, Form
1041; line 4, Form 1041-QFT; line 4,
Form 1041-N; or line 12, Form 990-T.

Line 7

Enter any unemployment compensation
reported on line 19, Schedule 1 (Form
1040) or line 20, Form 1040NR.

Line 8

Enter any other trade or business
income, gain, or loss not reported on
lines 1 through 7 that you reported on
your tax return.

Line 9

Combine all the entries from lines 1
through 8 on line 9. The resulting figure
can be a positive or negative number.

Part II—Adjustment for
Amounts not Attributable
to Trade or Business

Use Part II to report the income, gain, or
loss from your tax return that are not
from a trade or business. The
information will then be used to figure
the excess business loss. See
Definitions above.

Line 10

Enter the combined amount of income
or gain you reported on lines 1 through
8 above that is not from a trade or
business. See Definitions. If you filed a
tax return other than a Form 1040, see
the specific line references for the tax
return in the specific line instructions in
Part I.

Line 11

Note. For amounts reported on
Schedule D, if line 3 is a loss limited to
($3,000), determine the amount of the
loss not from a trade or business as
follows:
• If the loss from your trade or business
is less than ($3,000), enter the
difference between ($3,000) and your
trade or business loss.
• Do not enter any loss amount on this
line from Schedule D if the loss from
your trade or business is equal to or
greater than ($3,000).

Line 12

Subtract line 11 from line 10. The
resulting figure is your gain or loss that
is not from a trade or business. Use this
amount in Part III to figure your excess
business loss. See Definitions.

Part III—Limitation on
Losses

Use Part III to apply the threshold
limitation and figure the excess
business loss. See Definitions.

Line 14

Add lines 9 and 13. The resulting figure
can be a positive or negative number.

Line 16

If the resulting figure on this line is a
negative amount, then it is your excess
business loss. See Definitions. Although
it is a loss, you will report the excess
business loss adjustment as a positive
number on the “Other Income” line on
your tax return and enter “ELA” on the
dotted line. The “Other Income” lines
are located on the following lines based
on the type of tax return.
• Schedule 1 (Form 1040), line 21.
• Form 1040NR, line 21.
• Form 1041, line 8.
• Form 1041-QFT, Part II, line 4.
• Form 1041-N, Part II, line 4.
• Form 990-T, Part I, line 12 (applicable
to trusts only).

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required to complete and file this form
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Enter the combined amount of losses or
deductions you reported on lines 1

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Instructions for Form 461 (2018)