Form 461 - Limitation on Business Losses

2019

Department of the Treasury
Internal Revenue Service

Instructions for Form 461
Limitation on Business Losses
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 and
specific instructions for tax-exempt
trusts, 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 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 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
$255,000 ($510,000 for married
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 $255,000. 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.
• Form 1041-N, U.S. Income Tax
Return for Electing Alaska Native
Settlement Trusts.

Oct 15, 2019

• Form 990-T, Exempt Organization
Business Income Tax Return (and proxy
tax under section 6033(e)).

Definitions
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 2019, the
threshold amount is $255,000
($510,000 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’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, 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 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
Cat. No. 71453Z

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
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 2019.

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’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, then it’s not applicable.

Line 1

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

Line 2

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

Line 3

Enter any capital gains or losses
reported on Form 1040 or 1040-SR,

line 6; Form 1040-NR, line 14; Form
1041, line 4; Form 1041-QFT, Part II,
line 3; or Form 1041-N, Part II, line 3.

Line 4

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

Line 5

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 or 1040-SR),
line 5; Form 1040-NR, line 18; Form
1041, line 5; Form 1041-QFT, Part II,
line 4; or Form 1041-N, Part II, line 4.

Line 6

Enter any farm income or loss reported
on Schedule 1 (Form 1040 or 1040-SR),
line 6; Form 1040-NR, line 19; Form
1041, line 6; Form 1041-QFT, Part II,
line 4; or Form 1041-N, Part II, line 4.

Line 7

Enter any unemployment compensation
reported on Schedule 1 (Form 1040 or
1040-SR), line 7; or Form 1040-NR,
line 20.

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’s not from
a trade or business. The information will
then be used to figure the excess
business loss. See Definitions, earlier.

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
or 1040-SR, see the specific line
references for the tax return in the
specific line instructions in Part l.

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 or
1040-SR, see the specific line
references for the tax return in the
specific line instructions in Part l.

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.

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

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.

!

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.
• Don’t 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’s
not from a trade or business. Use this
amount in Part III to figure your excess
business loss. See Definitions, earlier.

Part III—Limitation on
Losses

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

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’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. The “Other Income”
lines are located on the following lines
based on the type of tax return.
• Schedule 1 (Form 1040 or 1040-SR),
line 8.
• Form 1040-NR, 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).

Line 11

Enter the combined amount of losses or
deductions you reported on lines 1

RECORDS

You’ll need to keep a record of
your excess business loss from
each tax year since it’s treated
-2-

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
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terrorism.
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.
Preparing the form . . . . . . . . 23 mins.
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Instructions for Form 461 (2019)