 Hello and welcome to this session. This is Professor Farhad and which we will discuss access business loss limitation I'm gonna abbreviate this as EBLL. What is the big idea of the access business loss limitation? Well, the point or the goal or the purpose is to limit the amount of non-business income That can be sheltered From taxes as a result of business losses. So the idea of this is you're gonna have I'm just gonna put here W2 W2 means wages. It doesn't have to be wages You could also have other income from 1099 miscellaneous commission income that you work for and this income is taxable So the key is to create the new rule where you don't generate losses Large enough here are the losses. You don't generate losses large enough That's gonna offset all your taxable income. So they want to limit non-business income that can be sheltered So you cannot shelter this if you have losses and you can deduct those losses against this income You can't shelter them. So if a non-corporate taxpayer has access business loss for the year, it's not allowed So what is not access business loss? It's gonna be defined in a quantitative number But the point is they want to limit you instead. It's carried Forward and treated as part of the taxpayers NOL carry forward in subsequent year So if you have access business loss and what is access? We're gonna see the number in a moment. Then you would carry the remainder as NOL carried forward for subsequent year Simply put the taxpayers allowed to deduct net business loss, which is business deduction That's an access of business income up to a threshold amount up to a certain amount And this amount is revised every year to account for inflation for example for year 2022 The amount for a single taxpayer is two hundred and seventy thousand on and for married filing jointly 540,000 Simply put access business loss limitation is the final limitation After we take into account the basis the tax basis at risk amount and then the passive activity loss rule Now if you don't know what tax basis at risk amount passive activity loss Please if you're the prior recording all I will work an example showing you how access business loss limitation and The other factors such as tax basis risk amount and passive activity loss They all interact that together But the access business loss is the final is the last limitation that applies to the deduction of the taxpayer loss Is the access business loss limitation? Now we're gonna start with a simple example. What does that mean? It means I'm gonna show you exactly what access business loss is separately by itself So you understand what it means and it's a very simple concept then we're gonna work another couple examples integrating EBLL with at risk rule at risk amount Pass and passive activity loss before we look at the example I would like to share with you an announcement about my company farhat lectures calm Before we proceed I would like to invite you to visit farhat lectures calm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam Miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of Lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today No obligation no credit card required Starting with this example in 2022 Adam a single taxpayer operates a business in which he materially Participate so Adam is running the business Adam is active his business generates gross income of 320,000 and deductions of 700,000 resulting in the loss of 280 not a good year now this large loss resulted from the acquisition of equipment for which Adam immediately Expensed and as a result Adam had a large loss What can we do with this loss? Well prior to this rule prior to the access business loss limitation Well the full amount would be deductible as NOL against active income because Adam is materially participating. It's active is running the business now Adam is limited To only 270 why because single for 2022 you are limited to 270 So what's gonna happen Adam can deduct 270 assuming he got income from other sources and The 10,000 remaining will be carried over for future year now if Adam was married finally jointly Then he can deduct the full amount because the limit for 2022 is 540,000 and every time I mentioned the year 2022 It means if you are listening to this recording in 2024 2025 and forward that number could change So it's subject to inflation. Now. This is what I this is what I meant by simple straightforward example Now I'm gonna look at another example where it's a little bit more involved during the tax year 20 x 3 Alex earned the following income interest income of 10,000 share of x y c x and y partnership ordinary Income Alex owns 5% interest and does not materially materially participate. So that's a passive passive income Real-state income 6000. What do we assume? We always assume it's passive wages of 82,000 royalty income of 210,000 and by the way, the interest is portfolio income the royalty is portfolio income and wages is active income Just I'm putting them in a different bucket in addition Alex has a 6% partner is a 6% was a 6% partner an A&B Partnership for which it's reported ordinary business law. So the partnership Reported 440,000 and Alex owns 6% of that again in this situation Also, Alex is passive Alex is not is not an active in this partnership Alex tax basis and the partnership of A&B was 27,000 and his at-risk basis is 21,000 The part the basis is 27 the at-risk is 21 the difference between them could be a non-request loan That's why the difference between them. So just you know, you need to understand the difference between How do we compute the tax basis? How do we compute the at-risk basis and we did so in a prior recording? But basically at-risk basis a stack spaces minus non-request non-request liability Now, what is the amount of loss that Alex may deduct in 20x3? So the first thing we're gonna do we're gonna put the different income and losses and separate buckets So in 20x3 the active income is 82,000 the passive income is 11,200 which is the 5,200 from XY partnership and Dorental real estate and the portfolio income is 12,100 which is interest income plus royalty income and you could be asked just for that What is the what is the income and we also have a passive loss of 440,000 times 6% which is 26,400 so the whole question the whole question revolved around this 26,400 how much can we deduct out of this? How much can we deduct? Well, here's what we're gonna have to do the deduction loss should clear for hurdles So when we're trying to find out how when we are trying to find out how much can we deduct? We're gonna clear for hurdle the fur the first hurdle is the tax basis limitation Okay, the tax basis Alex has tax basis of 27 which exceeds the law the amount of the loss Therefore, there is no loss suspended Based on the tax basis because he have enough tax basis. So the tax basis does not limit him in any way shape or form However, the at risk limitation. He's only at risk for 21,000 Therefore, what's gonna happen? Although he had losses of 26,400 now his losses that can be deducted are Trimmed down to guess how much? 21,000 therefore we already know that 5,400 of the losses are suspended why they are suspended because because for the at risk loss He cannot deduct them. So that's the first thing. So we're down to 21,000 Next the passive income limitation. That's the third one. Alex has passive income of 11,200. That's a great Now the 11,200 would reduce can be deducted against his passive loss. So 26,400 minus 11,200 now we are down to 9,800 now this 9,800 is suspended and carried forward because it's all PAL passive activity loss there's nothing we can do with it So that's the third limitation now the fourth limitation is the access business loss limitation But it does not apply here Why because the losses are not large because the access business loss limitations start at 274 single in 2022 and 544 married fighting jointly and Alex is not is not is not making that much. He doesn't have that much losses. So there's no it doesn't apply here We're gonna work an example where it applies. Let me show you how the limitation works first again We have tax basis of 27 the losses are 26,400 therefore we have no suspended losses under the tax basis. So Alex has have enough tax basis Alex does not have enough at risk basis. He have 21,000 only at risk amount and the losses are 26,400 therefore 5,400 are suspended then Alex will use of the 21,000 of allowed losses the duck 11,200 of the passive income and what he's left with 9,800 and this is passive activity loss suspended. So you have 5,400 suspended under the at risk rule and 9,800 suspended under the PAL and he was allowed to the duct He was allowed to the duct how much he was allowed to the duct 11,200 so simply put of a 26,400 he was able to the duct 11,200 after clearing the hurdles for passive losses Let me get the calculator and kind of show you how we how we computed the amount. So let me take a look Look at the calculator here and if we take 26,400 minus 11,200 what we're left with is 15,200 what we what we said is 5,400 is suspended because of the at risk rule and 1515,200 minus 5,400 what what remain is 9,800 Suspended under the PAL the passive activity loss because we don't have any more passive income to deduct this So may can take a note of these two figures because we're gonna use them shortly on the next slide Now let's assume Alex sells his interest in AMB partnership for a gain of 25,000 the following year He sold this partnership at a game. What happened when you sell your partnership when you sell your partnership your passive losses Becomes active basically you now you can use them now you can use them What's gonna happen? How much of the losses can be deducted the 5,400 at risk suspended? Remember of the 5,400 now we have a gain of 25,000 now We can use the 5,400 and we can use the 9,800 so those will be deducted now against his capital gain to save on his taxes So the losses that were suspended now they are active means we can use them now Because we are doing what selling the business selling the business now. Let's change the scenario a little bit To kind of use the EBLL rule the access business limitation loss And let's assume Alex has a cumulative suspended passive activity losses of 400,000 just accept this For AMB partnership because in the prior example the the the amounts were small then he sold his partnership His limited partnership also assume for that particular year Alex has 30,000 in passive income from XY his other partnership Which is passive income 300,000 in wages and guess what he went to Atlantic City and he won a hundred thousand dollar in gambling here, right? But just I'm just racking up numbers, but don't don't gamble, please Okay, so how much can he deduct in the year of disposal? Remember in the year of disposal the 400,000 suspended now it becomes active the first thing he can do He can use it against the 30,000 of passive losses. He's down to 370,000 now remember that That he is a single single individual and now this 370 is active what he can do of the 370 he can only use 270,000 against we're gonna take it against his double you to which is 300,000 of double you to he's gonna be able to deduct 270 what's left of taxable on his double you his double you to it's only 30,000 not a bad deal at all So but only he's limited to 270 now before this rule before this rule came into effect Which is during the Trump's administration 2017 the tax tax cuts and jobs act Alex would be able to deduct the Whole thing now it becomes active and for the year he'll be able to wipe out his wages He would be able to wipe out a large part of his taxable gain a taxable gambling But because of the rule he's limited to 270 now if he was married Filing jointly he can use the full amount and basically he will have no taxes for that year So if he deduct 270 what's left is 100,000 Therefore the remaining 100,000 he's not gonna lose them He's a he's gonna be carrying those as forward forward as net operating loss NOL not operating laws They turn into NOL they can be deducted in the future against passive activity or active income So it's it's not gonna it's not gonna go away. It just carry forward into the future What should you do now go to farhat lectures calm and work MCQs? Invest in yourself invest in your career invest in your education. Don't shortchange yourself Good luck study hard and stay safe