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Department of the Treasury
Internal Revenue Service
2023

Instructions for Form 461

Limitation on Business Losses

Section references are to the Internal Revenue Code unless • Form 1041-N, U.S. Income Tax Return for Electing Alaska
otherwise noted. Native Settlement Trusts.
• Form 990-T, Exempt Organization Business Income Tax
Return (and proxy tax under section 6033(e)).
General Instructions
Definitions
Future Developments
Go to IRS.gov/Form461 for the latest information about Form Excess business loss. An excess business loss is the
461 and its instructions. amount by which the total deductions (computed without
regard to any deduction allowed under section 172 or 199A)
Reminders from your trades or businesses are more than your total gross
income or gains from your trades or businesses, plus the
Limitation on excess business losses of noncorporate threshold amount. Such excess losses should be determined
taxpayers. The disallowance of excess business losses is without regard to any deductions, gross income, or gains
effective for tax years beginning after 2020 and before 2029. attributable to any trade or business of performing services of
Excess business losses. Excess business losses are now an employee.
computed without regard to any deduction allowed under Threshold amount. For 2023, the threshold amount is
section 172 or 199A and without regard to any deductions, $289,000 ($578,000 for taxpayers filing a joint return). These
gross income, or gains attributable to any trade or business amounts are indexed for inflation.
of performing services as an employee.
Treatment of capital gains and losses. Losses from sales
Treatment of capital gains and losses. Losses from sales or exchanges of capital assets are not included in the
or exchanges of capital assets are not included in the calculation of the total deductions from your trades or
calculation of the total deductions from your trades or businesses.
businesses.
Gains from the sales or exchanges of capital assets
Gains from sales or exchanges of capital assets should should not exceed the lesser of:
not exceed the lesser of capital gain net income limited to
only gains and losses attributable to a trade or business, or 1. Capital gain net income limited to only gains and
capital gain net income. losses attributable to a trade or business, or
2. Capital gain net income.
Purpose of Form
The Tax Cuts and Jobs Act limited the amount of losses from Trade or business. An activity qualifies as a trade or
the trades or businesses of noncorporate taxpayers that the business if your primary purpose for engaging in the activity
taxpayers can claim each year. Taxpayers can’t deduct an is for income or profit and you’re involved in the activity with
excess business loss (see Definitions, later) in the current continuity and regularity. The facts and circumstances of
year. However, the excess business loss is treated as a net each case determine if an activity is a trade or business. The
operating loss (NOL) carryover for subsequent years. See regularity of activities and transactions and the production of
Pub. 536, Net Operating Losses (NOLs) for Individuals, income are important elements. You don’t need to actually
Estates, and Trusts, for more information on NOL carryovers. make a profit to be in a trade or business as long as you have
Use Form 461 to figure the excess business loss. See Who a profit motive. However, you do need to make ongoing
Must File and the instructions for Line 16, later, to find where efforts to further the interests of your business.
to report the excess business loss on your return.
Note. If you own an interest in a partnership or S
Who Must File corporation, the trade or business determination is made at
that entity's level.
File Form 461 if you’re a noncorporate taxpayer and your net
losses from all of your trades or businesses are more than Ordering Rules
$289,000 ($578,000 for taxpayers filing a joint return). A trust
First, apply the at-risk rules; next, apply the passive activity
subject to tax under section 511 should complete Form 461 if
loss rules; and then apply the excess business loss rules.
it has a loss attributable to its trade or business of more than
See the Instructions for Form 6198, At-Risk Limitations. Also,
$289,000. See Definitions, later. Attach Form 461 to the
see Pub. 925, Passive Activity and At-Risk Rules.
applicable tax return you file.
• Form 1040, U.S. Individual Income Tax Return. Farming losses. Taxpayers with losses from a farming
• Form 1040-SR, U.S. Tax Return for Seniors. business must apply the excess business loss limitation
• Form 1040-NR, U.S. Nonresident Alien Income Tax before carrying any NOLs back 2 years. See the Instructions
Return. for Form 1045, Application for Tentative Refund.
• Form 1041, U.S. Income Tax Return for Estates and Trusts. Farming and nonfarming losses. If you incur both farming
• Form 1041-QFT, U.S. Income Tax Return for Qualified and nonfarming business losses that are more than the
Funeral Trusts. threshold amount (see Definitions, earlier), you must allocate

Jan 19, 2024 Cat. No. 71453Z

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the threshold amount first to the farming losses to the extent Line 5
you have an NOL. Enter any supplemental income or loss reported on a
Schedule E, such as income from rental real estate, royalties,
Transition Rules
partnerships, S corporations, estates, trusts, REMICs, etc.
If you had losses or deductions that were limited under other This is reported on Schedule 1 (Form 1040), line 5; Form
provisions of the Internal Revenue Code in prior tax years, 1041, line 5; Form 1041-QFT, Part II, line 4; or Form 1041-N,
those losses or deductions are included in figuring the Part II, line 4.
amount, if any, of your excess business loss in the current
year. Line 6
Additional Information Enter any farm income or loss reported on Schedule 1 (Form
1040), line 6; Form 1041, line 6; Form 1041-QFT, Part II,
See the following publications for more information about the line 4; or Form 1041-N, Part II, line 4.
items in these instructions.
• Pub. 225, Farmer’s Tax Guide. Line 7
• Pub. 536, Net Operating Losses (NOLs) for Individuals,
Estates, and Trusts. Leave line 7 blank.
• Pub. 925, Passive Activity and At-Risk Rules.
Line 8
Enter any other trade or business income, gain, or loss not
Specific Instructions reported on lines 1 through 7 that you reported on your tax
return.
Joint returns. Complete one Form 461 containing all the
information for both spouses. Line 9
Amended returns. Attach Form 461 to any applicable Combine all the entries from lines 1 through 8 on line 9. The
amended returns. resulting figure can be a positive or negative number.

Part I—Total Income/Loss Items Part II—Adjustment for Amounts not
Use Part I to report all the income and losses reflected on Attributable to Trade or Business
your applicable tax return. If you’re filing a return other than
Form 1040 or 1040-SR, see the instructions below for the Use Part II to report the income, gain, or loss from your tax
specific line that’s an equivalent to the line on Form 1040 or return that’s not from a trade or business. The information will
1040-SR. If the line instructions don’t reference a form listed then be used to figure the excess business loss. See
under Who Must File, earlier, then it’s not applicable. Definitions, earlier.

Line 1 Line 10
Leave line 1 blank. Enter the combined amount of income or gain you reported
on lines 1 through 8 above that’s not from a trade or
Line 2 business. See Definitions, earlier. If you filed a tax return
other than a Form 1040, see the specific line references for
Enter any business income or loss reported on Schedule 1
the tax return in the specific line instructions in Part l, earlier.
(Form 1040), line 3, or Form 1041, line 3.
Line 11
Line 3
Enter the combined amount of losses or deductions you
Enter any capital gains or losses reported on Form 1040 or
reported on lines 1 through 8 above that’s not from a trade or
1040-SR, line 7; Form 1040-NR, line 7; Form 1041, line 4;
business. See the definition of a trade or business, earlier. If
Form 1041-QFT, Part II, line 3; or Form 1041-N, Part II, line 3.
you filed a tax return other than a Form 1040, see the specific
Losses from sales or exchanges of capital assets are not line references for the tax return in the specific line
included in the calculation of the total deductions from your instructions in Part l, earlier.
trades or businesses. So any such amounts included here in Although losses and deductions are usually entered
line 3 should be added back on line 11 to remove them from ! as negative figures on other forms or worksheets,
the computation. CAUTION enter them as a positive figure on this line.
Gains from the sales or exchanges of capital assets
should not exceed the lesser of capital gain net income Losses from sales or exchanges of capital assets are not
limited to only gains and losses attributable to a trade or included in the calculation of trade or business deduction.
business, or capital gain net income. So any capital gains not Such amounts included on line 3 should be added back here
attributable to your trade or business that are included here in to remove it from the computation.
line 3 should be added back on line 10 to remove them from
the computation. Line 12
Subtract line 11 from line 10. The resulting figure is your gain
Line 4 or loss that’s not from a trade or business. Use this amount in
Enter any other gains or losses reported on Schedule 1 Part III to figure your excess business loss. See Definitions,
(Form 1040), line 4; Form 1041, line 7; Form 1041-QFT, Part earlier.
II, line 4; or Form 1041-N, Part II, line 4.
Part III—Limitation on Losses
Use Part III to apply the threshold limitation and figure the
excess business loss. See Definitions, earlier.

2 Instructions for Form 461 (2023)

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Line 14 don’t provide this information, or you provide incomplete or
Add lines 9 and 13. The resulting figure can be a positive or false information, you may be subject to penalties.
negative number. You’re not required to provide the information requested
on a form that’s subject to the Paperwork Reduction Act
Line 16
unless the form displays a valid OMB control number. Books
If the resulting figure on this line is a negative amount, then or records relating to a form or its instructions must be
it’s your excess business loss. See Definitions, earlier. retained as long as their contents may become material in the
Although it’s a loss, you will report the excess business loss administration of any Internal Revenue law. Generally, tax
adjustment as a positive number on the “Other income” line returns and return information are confidential, as required by
on your tax return and enter “ELA” on the dotted line. For section 6103. However, we may give this information to the
Schedule 1 (Form 1040), enter any excess business loss Department of Justice for civil and criminal litigation, and to
adjustment on line 8p. The “Other Income” lines are located cities, states, the District of Columbia, and U.S.
on the following lines based on the type of tax return. commonwealths and territories to carry out their tax laws. We
• Form 1041, line 8. may also disclose this information to other countries under a
• Form 1041-QFT, Part II, line 4. tax treaty, to federal and state agencies to enforce federal
• Form 1041-N, Part II, line 4. nontax criminal laws, or to federal law enforcement and
• Schedule A (Form 990-T), Part I, line 12 (applicable to intelligence agencies to combat terrorism.
trusts only).
You’ll need to keep a record of your excess business The time needed to complete and file this form will vary
loss from each tax year because it’s treated as an depending on individual circumstances. The estimated
RECORDS NOL carryover for subsequent taxable years. See burden for individual and business taxpayers filing this form is
Pub. 536, Net Operating Losses (NOLs) for Individuals, approved under OMB control numbers 1545-0074 and
Estates, and Trusts for more information on NOL carryovers 1545-0123 and is included in the estimates shown in the
and reporting NOLs on future tax year returns. 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 Preparing the form. . . . . . . . 23 min.
Revenue laws of the United States. We need this information
to ensure that you’re complying with these laws and to allow If you have suggestions for making this form simpler, we
us to figure and collect the right amount of tax. Our legal right would be happy to hear from you. See the instructions for
to ask for the information requested on this form is sections your income tax return.
6001, 6011, 6012(a), and 6109 and their regulations. If you

Instructions for Form 461 (2023) 3

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