Loss Cause: Developments in the Section 461(l) Excess Business Loss Rule as of Spring 2021

Abstract

This is a follow-up to a 2019 article entitled The Curious Case of Section 461(l): Why This Unclear and Unwise New Rule Should Be Construed as Narrowly as Possible. That article offered an analysis of section 461(l)’s excess-business-loss limitation rule as originally enacted. This update, which is current as of April 23, 2021, discusses developments that have occurred with respect to section 461(l) since the earlier article was published.Among other things, this article describes amendments to section 461(l) that were enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 and as part of the American Rescue Plan Act of 2021 (ARPA). Under those amendments, the excess-business-loss rule was temporarily suspended for 2018, 2019, and 2020, but was then extended from the end of 2025 through the end of 2026. The CARES Act amendments also resolved several ambiguities in section 461(l)’s original language. Unfortunately, at least one of those “clarifying” amendments expands the reach of the excess-business-loss rule and exacerbates its onerous effects on taxpayers.Meanwhile, some lawmakers (as well as some academic and press commentators) have been advocating to make section 461(l) permanent and to reinstate the provision, retroactively, for 2018, 2019, and 2020. As of the time of this writing, those efforts have not succeeded. But the proponents of such measures have not stopped trying. This update explores all of these points, and the policy issues that they raise, in further detail.