Using my carried-forward Qualified Business (Net) Loss is INCREASING my taxes this year

[derek1287]

I'm applying my Qualified Business (Net) Loss from last year to this year's tax return, but it doesn't decrease my AGI; it only decreases my QBI deduction. Therefore INCREASING my tax load. Am I missing something?

Details:

- I incurred a $1000 loss on my Schedule C (sole proprietorship) business in 2020, which I carried forward as a $1000 qualified business (loss) carryforward (Form 8995 Line 16).

- For tax year 2021, I had a $200 profit from the same Schedule C business. However when I try to use $200 of my $1000 carried-forward QBI loss from 2020, my tax burden INCREASES.

- The is because by QBI deduction goes to zero (rightly so, since my QBI is now $0 after the carry-forward is applied), but my Schedule C income stays the same at $200. So now I'm still paying the tax on the $200 Schedule C income, but now without any QBI income deduction.

Shouldn't applying a carried-forward qualified business loss make your AGI go down as well? Why would anyone want to use their carried-forward loss otherwise?

Thanks for your help.

[AliciaP1 · Accepted solution]

You are only applying a carried forward QBI loss - that has no impact on your operating income.  It is likely that your prior year's loss that created the QBI loss, was allowable in full against other income on your return, but there was no additional QBI to offset the loss against.  Until your QBI exceeds your QBI Loss Carryforward, you will experience this discrepancy.

[derek1287]

OK - so a carried-forward QBI loss can actually be thought of more as a tax liability, vs an asset, is that correct?

My expectation was originally that it'd be more like a carried-forward NOL (Net Operating Loss), which reduces your tax obligation, instead of potentially increases it. 

Thank you

[AliciaP1]

Just like NOLs and PALs (Passive Activity Losses), QBI losses can only be taken against QBI.  It's neither an asset nor a liability.  It is merely a reportable adjustment to income.  In your case this year, it is not a favorable adjustment.

@derek1287