461 Instructions for Form 461

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2023

Instructions for Form 461

Department of the Treasury
Internal Revenue Service

Limitation on Business Losses
• 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)).

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Section references are to the Internal Revenue Code unless
otherwise noted.

General Instructions

Definitions

Future Developments

Go to IRS.gov/Form461 for the latest information about Form
461 and its instructions.

Reminders

Limitation on excess business losses of noncorporate
taxpayers. The disallowance of excess business losses is
effective for tax years beginning after 2020 and before 2029.

Excess business losses. Excess business losses are now
computed without regard to any deduction allowed under
section 172 or 199A and without regard to any deductions,
gross income, or gains attributable to any trade or business
of performing services as an employee.

Treatment of capital gains and losses. Losses from sales
or exchanges of capital assets are not included in the
calculation of the total deductions from your trades or
businesses.
Gains from sales or exchanges of capital assets should
not exceed the lesser of capital gain net income limited to
only gains and losses attributable to a trade or business, or
capital gain net income.

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 can’t deduct an
excess business loss (see Definitions, later) 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, later, to find where to report the
excess business loss on your return.

Who Must File

File Form 461 if you’re a noncorporate taxpayer and your net
losses from all of your trades or businesses are more than
$289,000 ($578,000 for taxpayers filing a joint return). A trust
subject to tax under section 511 should complete Form 461 if
it has a loss attributable to its trade or business of more than
$289,000. See Definitions, later. Attach Form 461 to the
applicable tax return you file.
• Form 1040, U.S. Individual Income Tax Return.
• Form 1040-SR, U.S. Tax Return for Seniors.
• Form 1040-NR, 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.
Sep 19, 2023

Excess business loss. An excess business loss is the
amount by which the total deductions (computed without
regard to any deduction allowed under section 172 or 199A)
from your trades or businesses are more than your total gross
income or gains from your trades or businesses, plus the
threshold amount. Such excess losses should be determined
without regard to any deductions, gross income, or gains
attributable to any trade or business of performing services of
an employee.

Threshold amount. For 2023, the threshold amount is
$289,000 ($578,000 for taxpayers filing a joint return). These
amounts are indexed for inflation.
Treatment of capital gains and losses. Losses from sales
or exchanges of capital assets are not included in the
calculation of the total deductions from your trades or
businesses.
Gains from the sales or exchanges of capital assets
should not exceed the lesser of:
1. Capital gain net income limited to only gains and
losses attributable to a trade or business, or
2. Capital gain net income.
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’re 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 don’t 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.
Note. If you own an interest in a partnership or S
corporation, the trade or business determination is made at
that entity's level.

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, At-Risk 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 NOLs 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, earlier), you must allocate

Cat. No. 71453Z

the threshold amount first to the farming losses to the extent
you have an NOL.

1041, line 5; Form 1041-QFT, Part II, line 4; or Form 1041-N,
Part II, line 4.

Transition Rules

Line 6

If you had losses or deductions that were limited under other
provisions of the Internal Revenue Code in prior tax years,
those losses or deductions are included in figuring the
amount, if any, of your excess business loss in the current
year.

Enter any farm income or loss reported on Schedule 1 (Form
1040), line 6; Form 1041, line 6; Form 1041-QFT, Part II,
line 4; or Form 1041-N, Part II, line 4.

Line 7

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Leave line 7 blank.

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.

Line 8

Specific Instructions

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

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

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

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

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

Part I—Total Income/Loss Items

Use Part I to report all the income and losses reflected on
your applicable tax return. If you’re filing a return other than
Form 1040 or 1040-SR, see the instructions below for the
specific line that’s an equivalent to the line on Form 1040 or
1040-SR. If the line instructions don’t reference a form listed
under Who Must File, earlier, then it’s not applicable.

Line 10

Enter the combined amount of income or gain you reported
on lines 1 through 8 above that’s not from a trade or
business. See Definitions, earlier. 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 l, earlier.

Line 1

Line 11

Leave line 1 blank.

Enter the combined amount of losses or deductions you
reported on lines 1 through 8 above that’s not from a trade or
business. See the definition of a trade or business, earlier. 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 l, earlier.

Line 2

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

Line 3

Enter any capital gains or losses reported on Form 1040 or
1040-SR, line 7; Form 1040-NR, line 7; Form 1041, line 4;
Form 1041-QFT, Part II, line 3; or Form 1041-N, Part II, line 3.

!

CAUTION

Losses from sales or exchanges of capital assets are not
included in the calculation of the total deductions from your
trades or businesses.

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

Losses from sales or exchanges of capital assets are not
included in the calculation of trade or business deduction.
Such amounts included on Line 3 should be added back here
to remove it from the computation.

Gains from the sales or exchanges of capital assets
should not exceed the lesser of capital gain net income
limited to only gains and losses attributable to a trade or
business, or capital gain net income. So any such amounts
included here in Line 3 should be added back on line 11 to
remove them from the computation.

Line 12

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

Line 4

Part III—Limitation on Losses

Enter any other gains or losses reported on Schedule 1
(Form 1040), line 4; Form 1041, line 7; Form 1041-QFT, Part
II, line 4; or Form 1041-N, Part II, line 4.

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

Line 5

Line 14

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 Schedule 1 (Form 1040), line 5; Form

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

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Instructions for Form 461 (2023)

Line 16

You’re not required to provide the information requested
on a form that’s subject to the Paperwork Reduction Act
unless the form displays a valid OMB control number. Books
or records relating to a form or its instructions must be
retained as long as their contents may become material in the
administration of any Internal Revenue law. Generally, tax
returns and return information are confidential, as required by
section 6103. However, we may give this information to the
Department of Justice for civil and criminal litigation, and to
cities, states, the District of Columbia, and U.S.
commonwealths and possessions to carry out their tax laws.
We may also disclose this information to other countries
under a tax treaty, to federal and state agencies to enforce
federal nontax criminal laws, or to federal law enforcement
and intelligence agencies to combat terrorism.

If the resulting figure on this line is a negative amount, then
it’s your excess business loss. See Definitions, earlier.
Although it’s 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. For
Schedule 1 (Form 1040), enter any excess business loss
adjustment on line 8p. The “Other Income” lines are located
on the following lines based on the type of tax return.
• Form 1041, line 8.
• Form 1041-QFT, Part II, line 4.
• Form 1041-N, Part II, line 4.
• Schedule A (Form 990-T), Part I, line 12 (applicable to
trusts only).

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You’ll need to keep a record of your excess business
loss from each tax year because it’s treated as an
RECORDS 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.

The time needed to complete and file this form will vary
depending on individual circumstances. The estimated
burden for individual and business taxpayers filing this form is
approved under OMB control numbers 1545-0074 and
1545-0123 and is included in the estimates shown in the
instructions for their individual and business income tax
return. The estimated burden for all other taxpayers who file
this form is shown below.

Privacy Act and Paperwork Reduction Act Notice. We
ask for the information on this form to carry out the Internal
Revenue laws of the United States. We need this information
to ensure that you’re complying with these laws and to allow
us to figure and collect the right amount of tax. Our legal right
to ask for the information requested on this form is sections
6001, 6011, 6012(a), and 6109 and their regulations. If you
don’t provide this information, or you provide incomplete or
false information, you may be subject to penalties.

Instructions for Form 461 (2023)

Preparing the form. . . . . . . . 23 min.

If you have suggestions for making this form simpler, we
would be happy to hear from you. See the instructions for
your income tax return.

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