Recent updates to the rules on business income, trade or business activities, and pass-through entity taxation in the United States 🇺🇸 have important effects for immigrants, entrepreneurs, and anyone involved in U.S. business ventures. These changes impact how business income and losses are reported, what counts as a trade or business, and how losses can be deducted. This update explains what has changed, who is affected, effective dates, what actions are required, and what these changes mean for pending and future applications.
Summary of Key Changes
The IRS has clarified and updated several important areas:
- Definition of Trade or Business: The IRS continues to rely on court decisions to define what counts as a trade or business, focusing on profit motive and regular, ongoing activity.
- Reporting Business Income and Losses: There are specific forms and schedules for different types of business income, including those from pass-through entities.
- Loss Deduction Limits: There are four main limits on how much business loss you can deduct: basis limitation, at-risk limitation, passive activity limitation, and excess business loss limitation.
- Excess Business Loss Limitation Extended: The limit on excess business losses, first introduced in 2018, is now extended through 2028.
- Net Operating Loss (NOL) Rules: NOLs can be carried forward indefinitely, but deductions are limited to 80% of taxable income for losses from 2018 and later.
These changes are especially important for immigrants running businesses in the United States 🇺🇸, as well as for those involved in partnerships, S corporations, or other pass-through entities.
Who Is Affected
The updates affect a wide range of people and businesses, including:
- Self-employed individuals (sole proprietors, independent contractors)
- Partners in partnerships
- Shareholders in S corporations
- Owners of rental real estate, farms, or other business ventures
- Immigrants who own or invest in U.S. businesses
- Anyone with business income or losses reported on their tax return
If you are involved in any trade or business, or if you receive income or loss from a pass-through entity, these rules apply to you.
Effective Dates
- Excess Business Loss Limitation: Originally effective for tax years 2018–2025, extended through 2026 by the American Rescue Plan Act, and further extended through 2028 by the Inflation Reduction Act of 2022.
- Net Operating Loss (NOL) Limitation: Applies to NOLs arising in tax years beginning after December 31, 2017.
- Other rules: Ongoing, with annual updates to threshold amounts and forms.
Required Actions
To comply with the latest rules, taxpayers should:
- Determine if your activity qualifies as a trade or business: Make sure your activity is regular, ongoing, and has a profit motive.
- Use the correct IRS forms and schedules: Report business income and losses on the right forms, such as Schedule C, Schedule E, Schedule F, Form 4797, and others.
- Apply the four loss deduction limits in order: Basis, at-risk, passive activity, and excess business loss.
- Use Form 461 to calculate excess business loss if your losses exceed the annual threshold.
- Carry forward any disallowed losses: Understand how to use NOLs in future years.
- Attach required statements: When claiming an NOL deduction, include a statement with your tax return showing how you calculated the NOL.
For official guidance, always refer to the IRS Business Income and Loss page.
Detailed Explanation of Key Concepts
What Counts as a Trade or Business?
The IRS uses two main tests to decide if an activity is a trade or business:
- Profit Motive: You must be trying to make money, even if you don’t always succeed. If you are doing something mainly for fun or as a hobby, it doesn’t count.
- Regular and Ongoing Activity: You must be involved in the activity regularly and continuously, not just once in a while.
For example, if you open a small shop and work there every week, that’s a trade or business. If you sell a few items online once a year, that’s probably not.
If you own part of a pass-through entity (like a partnership or S corporation), the trade or business test is done at the entity level.
Types of Business Income and Where to Report
Business income or loss can come from many sources. Here’s where to report each type:
- Sole proprietors and independent contractors: Use Schedule C (Form 1040) for business income or loss.
- Capital gains or losses: Use Schedule D (Form 1040).
- Other gains or losses: Use Form 4797 for sales of business property.
- Rental real estate, royalties, partnerships, S corporations, trusts: Use Schedule E (Form 1040).
- Farm income or loss: Use Schedule F (Form 1040).
- Unemployment compensation and other income: Report on Form 1040 as directed.
If you are a partner or S corporation shareholder, you’ll receive a Schedule K-1 from the entity, showing your share of income, losses, deductions, and credits.
What Is a Pass-Through Entity?
A pass-through entity is a business that does not pay tax itself. Instead, the income or loss “passes through” to the owners, who report it on their own tax returns. Partnerships and S corporations are the most common pass-through entities. This structure is popular with immigrants and small business owners because it avoids double taxation.
Business Loss Limitations
There are four main limits on how much business loss you can deduct:
- Basis Limitation: You can’t deduct more loss than your investment (basis) in the business. If you lose more than your basis, you carry the extra loss forward to future years.
- At-Risk Limitation: You can only deduct losses up to the amount you could actually lose in the business. This includes your own money, property, and certain loans you are personally responsible for.
- Passive Activity Limitation: If you don’t “materially participate” in the business, your losses are passive. You can only use passive losses to offset passive income, not other income like wages.
- Excess Business Loss Limitation: For 2024, you can only deduct up to $305,000 in business losses ($610,000 if married filing jointly). Any loss above this is carried forward as a net operating loss.
Let’s look at each in more detail.
Basis Limitation
Your basis is the amount you have invested in the business. For partnerships and S corporations, you can’t deduct more loss than your basis. If your loss is bigger than your basis, you carry the extra loss forward.
At-Risk Limitation
You are “at risk” for the money and property you put into the business, plus certain loans you are personally responsible for. You are not at risk for loans where you are not personally liable, or for money protected by guarantees.
For example, if you invest $50,000 and personally guarantee a $25,000 loan, you are at risk for $75,000.
Passive Activity Limitation
If you don’t take an active role in the business, your losses are passive. The IRS has several tests to decide if your participation is “material.” For example, if you work more than 500 hours in the business during the year, you materially participate.
Passive losses can only be used to offset passive income. If you have more passive losses than passive income, you carry the extra loss forward.
Excess Business Loss Limitation
This rule limits how much total business loss you can deduct each year. For 2024, the limit is $305,000 for single filers and $610,000 for joint filers. If your losses are bigger than this, the extra is carried forward as a net operating loss (NOL).
This rule applies after the other three limits. Use Form 461 to calculate your excess business loss. If your loss is below the threshold, you don’t need to file Form 461.
Example: Blake, a single taxpayer, has $400,000 in dividend income and $800,000 in net business losses in 2024. He can only deduct $305,000 of the business loss. The remaining $495,000 is carried forward as an NOL.
Net Operating Loss (NOL)
If your business deductions are more than your business income, you may have a net operating loss. You can carry forward an NOL to future years and use it to reduce taxable income, but the deduction is limited to 80% of taxable income.
NOLs from before 2018 follow old rules, including a 2-year carryback and 20-year carryover. NOLs from 2018 and later can only be carried forward, not back, and are limited to 80% of taxable income.
How to Figure and Report NOL
When figuring your NOL, only include income and expenses directly related to your trade or business. Don’t include:
- Capital losses over capital gains
- Section 1202 exclusion of gain from small business stock
- Non-business deductions over non-business income
- Previous NOL deductions
Report your NOL deduction on Schedule 1 (Form 1040), Part I, as negative other income. Attach a statement showing your NOL calculation.
Special Considerations for Immigrants and International Entrepreneurs
Immigrants who own or invest in U.S. businesses, especially through pass-through entities, need to pay close attention to these rules. Many immigrants use partnerships or S corporations to start businesses in the United States 🇺🇸. Understanding the limits on deducting business losses and the rules for carrying forward NOLs is critical for tax planning and compliance.
If you are applying for a visa or green card based on business investment or entrepreneurship, your reported business income and losses can affect your application. For example, showing regular business income and active participation can support your case for certain visa categories. However, large reported losses may raise questions about the viability of your business.
Implications for Pending Applications
If you have a pending immigration application that relies on your business activity, be sure to:
- Document your trade or business activity: Keep records showing regular, ongoing business operations and a clear profit motive.
- Report all business income and losses accurately: Use the correct forms and schedules.
- Understand how loss limitations affect your reported income: If your losses are limited, your reported income may be higher than your actual cash flow.
- Consult with a qualified tax advisor or immigration attorney: The rules are complex, and mistakes can affect your immigration status.
According to analysis by VisaVerge.com, many immigrants face challenges when reporting business income and losses, especially when involved in pass-through entities. Careful planning and accurate reporting are essential to avoid problems with both the IRS and immigration authorities.
Actionable Takeaways
- Review your business activities to make sure they qualify as a trade or business.
- Use the right IRS forms to report all business income and losses.
- Apply the four loss deduction limits in order: basis, at-risk, passive activity, and excess business loss.
- Carry forward any disallowed losses and use them in future years as allowed.
- Attach all required statements when claiming an NOL deduction.
- Stay updated on annual threshold amounts and changes to IRS forms.
- Seek professional advice if you have complex business structures or pending immigration applications.
For more information, visit the IRS Business Income and Loss page for official guidance and resources.
By following these steps and understanding the latest rules, immigrants and business owners can make informed decisions, stay compliant with U.S. tax law, and support their immigration goals.
Learn Today
Trade or Business → An activity with profit motive and regular ongoing operations recognized by IRS for tax purposes.
Pass-Through Entity → A business structure where income or losses pass through to owners, avoiding corporate tax.
Basis Limitation → Limit on deducting losses not exceeding your investment in the business.
At-Risk Limitation → Loss deduction limit based on your actual financial risk in the business.
Net Operating Loss (NOL) → When business deductions exceed income; can be carried forward with deduction limits.
This Article in a Nutshell
IRS updated business income rules affecting immigrants and entrepreneurs, clarifying loss deductions, reporting forms, and trade or business definitions for compliance and tax planning.
— By VisaVerge.com
