LOSS CARRYFORWARD FORM 8895

[concisa]

Form 8995 line 3 shows a LOSS carryforward from prior years resulting from Schedule C losses.

The same form show a LOSS carryover to next year on line 16 (line 3 + this year's Schedule C loss).

Shouldn't the amount on Line 3 (or a portion of it) be carried to form 1040 via Schedule 1 line 8?

Thanks

Armando Souza

[JohnW152]

No, there's no portion of Form 8995 that would be included as income in Part I of Form 1040 (Schedule 1), Additional Income and Adjustments to Income. 

Line 3 is part of a computation that determines the qualified business income deduction. 

Line 16 calculates a qualified business (loss) carryforward. According to Line 16 in the Instructions for Form 8995:

This is the amount to be carried forward to the next year. This amount will offset QBI in later tax years regardless of whether the trade(s) or business(es) that generated the loss is still in existence. This carryforward doesn’t affect the deductibility of any loss for purposes of any other provisions of the Code.

Neither line flows through to Schedule 1.

[concisa]

Thanks a lot John,

How would this loss is used (or be used in the future)? Will it be carry forward indefinitely? Is it used against ordinary income? Passive income? 

What am I missing?

Thanks again

Armando

[JohnW152]

If you have a net operating loss from last year, you can include that information in TurboTax to see if there'll be a tax benefit.  To enter your net operating loss from last year in TurboTax Online:

1. If you don’t see 2022 TAXES in the left pane, select the dropdown to the right of Income & Expenses on the Hi, let’s keep working on your taxes! page and then select Let’s get started, Pick up where you left off, or Review/Edit. 
   • Otherwise, in the left pane, select the Federal dropdown, then Income & Expenses  (This is labelled Wages & Income in TurboTax Self-Employed)
2. Scroll down and select the Show more dropdown to the right of Other Business Situations
3. Select  Start or Revisit to the right of Net Operating Loss/QBI Carryforward Loss
4. Continue through the ensuing pages, providing all information as appropriate.

An NOL can offset taxable income, regardless of its character. However, the NOL carryforward rules are somewhat complicated.  According to the IRS' Net operating losses: 

Most taxpayers no longer have the option to carryback a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2020 can only be carried forward. The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017. The CARES Act provided for a special 5-year carryback for taxable years beginning in 2018, 2019 and 2020. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. Also, for losses arising in taxable years beginning after December 31, 2017, the net operating loss deduction for taxable years beginning after December 31, 2020, is limited to 80% of the excess (if any) of taxable income (determined without regard to the deduction, QBID, and Section 250 deduction) over the total NOLD from NOLs arising in taxable years beginning before January 1, 2018.

Please see NOL deduction limitation in IRS Publication 536 (2022), Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, which provides worksheets, step by step examples and explanations of the adjustments to make to your net operating loss as you carry it from year to year.

[concisa]

Thanks a lot John for your comprehensive explanation. 

By the way, I'm using TT Home and Business.

However, I'm still confused. Apparently there two different expressions: 

1. NOL

2. 8895 = Losses carryforward

Your explanation deals with NOL as does Publ 536. 

You see, I did not see NOL on 8895. I only saw: losses carryforward. 

TT takes care of passive losses on Sch D, K-1, etc . It uses them and carries them forward automatically.

The same is not happening for the losses indicated on Form 8895. 

Do you see my confusion? Those TT did use those losses this year. Why not? Should it? Will TT use them next year?

Thanks again.

Armando

[JohnB5677 · Accepted solution]

Just to be clear, we are dealing with form 8995 (Qualified Business Income Deduction), Not 8895 (one-time dividends received deduction for certain cash dividends from controlled foreign corporations).

I'm going to start with your original question.

Form 8995 line 3 shows a LOSS carryforward from prior years resulting from Schedule C losses.

• This represents a carryover loss from 2021 for the Qualified Business Income Deduction. Not a NOL.
• What is Form 8995?

The same form show a LOSS carryover to next year on line 16 (line 3 + this year's Schedule C loss).

• You are correct.  Line 16 will now carry over to 2023's tax return.
• If your net qualified business income is negative, then you have a qualified business loss. You can't claim a deduction on your current year's return, but you will carry the loss forward to the following year.

Shouldn't the amount on Line 3 (or a portion of it) be carried to form 1040 via Schedule 1 line 8?

• No, this is not a NOL.  Its an adjustment to the Qualified Business Income Deduction.

Your final questions were: Do you see my confusion? Those TT did use those losses this year. Why not? Should it? Will TT use them next year?

• I did understand your confusion,
• You did use the losses from 2021 Line 3 on your 2022 tax return, but
• They may not have been usable because you may not have made a large enough profit.
• As line 16 indicates, you will have the loss carryforward available in 2023.

If this does not completely answer your question, please contact us again and provide some additional details.

[concisa]

Thanks a lot, John.

Bottomline:

1. 8995 losses are not used against both ordinary income and passive income.

2. I terminated the business in 2022.  Therefore those losses will not be used in the future...

3. Unless I show a profit in another business.

Does that summarize it?

Thanks again, John.

Armando

[JohnB5677 · Accepted solution]

Yes, you summarized it perfectly.

1. 8995 losses are not used against both ordinary income and passive income.

• 8995 carryforwards are only used against Qualified Business income.

2. I terminated the business in 2022.  Therefore, those losses will not be used in the future...

• If someone owns multiple eligible businesses:  … (the) taxpayer must net their QBI, including losses, from multiple trades or businesses (including aggregated trades or businesses). So, qualified business losses from one business will offset QBI from other trades or businesses (including aggregated trades or businesses) in proportion to the net income of the trades or businesses with QBI.
• On the other hand, what if you don’t have another business against which you can net losses? In this situation: … the carried forward negative QBI will be treated as negative QBI from a separate trade or business for [the] purpose of determining the QBI Component in the next taxable year. 
• Simply put, a loss doesn’t really go away. Rather, the IRS allows businesses to carry forward QBI losses to subsequent years. 

3. Unless I show a profit in another business.

• That is correct.

[concisa]

Thanks again, John.... Good work.