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Department of the Treasury
Internal Revenue Service
2021
Instructions for Form 461
Limitation on Business Losses
Section references are to the Internal Revenue where to report the excess business Gains from the sales or exchanges of
Code unless otherwise noted. loss on your return. capital assets should not exceed the
lesser of:
General Instructions Who Must File 1. Capital gain net income limited to
File Form 461 if you’re a noncorporate only gains and losses attributable to a
Future Developments taxpayer and your net losses from all of trade or business, or
For the latest information about your trades or businesses are more than 2. Capital gain net income.
developments related to Form 461 and $262,000 ($524,000 for married
its instructions, such as legislation taxpayers filing a joint return). A trust Trade or business. An activity
enacted after they were published and subject to tax under section 511 should qualifies as a trade or business if your
specific instructions for tax-exempt complete Form 461 if it has a loss primary purpose for engaging in the
trusts, go to IRS.gov/Form461. attributable to its trade or business of activity is for income or profit and you’re
more than $262,000. See Definitions, involved in the activity with continuity
What’s New later. Attach Form 461 to the applicable and regularity. The facts and
tax return you file. circumstances of each case determine if
Limitation on excess business los- • Form 1040, U.S. Individual Income an activity is a trade or business. The
ses of noncorporate taxpayers. The Tax Return. regularity of activities and transactions
disallowance of excess business losses • Form 1040-SR, U.S. Tax Return for and the production of income are
is now effective for tax years beginning Seniors. important elements. You don’t need to
after 2020 and before 2027. • Form 1040-NR, U.S. Nonresident actually make a profit to be in a trade or
Excess business losses. Excess Alien Income Tax Return. business as long as you have a profit
business losses are now computed • Form 1041, U.S. Income Tax Return motive. However, you do need to make
without regard to any deduction allowed for Estates and Trusts. ongoing efforts to further the interests of
under section 172 or 199A and without • Form 1041-QFT, U.S. Income Tax your business.
regard to any deductions, gross income, Return for Qualified Funeral Trusts.
or gains attributable to any trade or • Form 1041-N, U.S. Income Tax Note. If you own an interest in a
business of performing services as an Return for Electing Alaska Native partnership or S corporation, the trade
employee. Settlement Trusts. or business determination is made at
• Form 990-T, Exempt Organization that entity's level.
Treatment of capital gains and los- Business Income Tax Return (and proxy
ses. Losses from sales or exchanges tax under section 6033(e)). Ordering Rules
of capital assets are not included in the
calculation of the total deductions from First, apply the at-risk rules; next, apply
your trades or businesses. Definitions the passive activity loss rules; and then
Gains from sales or exchanges of Excess business loss. An excess apply the excess business loss rules.
capital assets should not exceed the business loss is the amount by which See the Instructions for Form 6198, At-
lesser of capital gain net income limited the total deductions (computed without Risk Limitations. Also, see Pub. 925,
to only gains and losses attributable to a regard to any deduction allowed under Passive Activity and At-Risk Rules.
trade or business, or capital gain net section 172 or 199A) from your trades Farming losses. Taxpayers with
income. or businesses are more than your total losses from a farming business must
gross income or gains from your trades apply the excess business loss
Purpose of Form or businesses, plus the threshold limitation before carrying any NOLs
amount. Such excess losses should be
The Tax Cuts and Jobs Act limited the back 2 years. See the Instructions for
determined without regard to any
amount of losses from the trades or Form 1045, Application for Tentative
deductions, gross income, or gains
businesses of noncorporate taxpayers Refund.
attributable to any trade or business of
that the taxpayers can claim each year. Farming and nonfarming losses. If
performing services of an employee.
Taxpayers can’t deduct an excess you incur both farming and nonfarming
business loss (see Definitions, later) in Threshold amount. For 2021, the business losses that are more than the
the current year. However, the excess threshold amount is $262,000 threshold amount (see Definitions,
business loss is treated as a net ($524,000 for married taxpayers filing a earlier), you must allocate the threshold
operating loss (NOL) carryover. See joint return). These amounts are amount first to the farming losses to the
Pub. 536, Net Operating Losses (NOLs) indexed for inflation. extent you have an NOL.
for Individuals, Estates, and Trusts, for Treatment of capital gains and los-
more information on NOL carryovers. ses. Losses from sales or exchanges Transition Rules
Use Form 461 to figure the excess of capital assets are not included in the If you had losses or deductions that
business loss. See Who Must File and calculation of the total deductions from were limited under other provisions of
the instructions for Line 16, later, to find your trades or businesses. the Internal Revenue Code in prior tax
Jan 24, 2022 Cat. No. 71453Z
