2023 Instructions for Form 461

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2023

Instructions for Form 461

Limitation on Business Losses

Department of the Treasury

Internal Revenue Service

Section references are to the Internal Revenue Code unless

otherwise noted.

General Instructions

Future Developments

Go to IRS.gov/Form461 for the latest information about Form

461 and its instructions.

Reminders

Limitation on excess business losses of noncorporate

taxpayers. The disallowance of excess business losses is

effective for tax years beginning after 2020 and before 2029.

Excess business losses. Excess business losses are now

computed without regard to any deduction allowed under

section 172 or 199A and without regard to any deductions,

gross income, or gains attributable to any trade or business

of performing services as an employee.

Treatment of capital gains and losses. Losses from sales

or exchanges of capital assets are not included in the

calculation of the total deductions from your trades or

businesses.

Gains from sales or exchanges of capital assets should

not exceed the lesser of capital gain net income limited to

only gains and losses attributable to a trade or business, or

capital gain net income.

Purpose of Form

The Tax Cuts and Jobs Act limited the amount of losses from

the trades or businesses of noncorporate taxpayers that the

taxpayers can claim each year. Taxpayers can’t deduct an

excess business loss (see

Definitions, later) in the current

year. However, the excess business loss is treated as a net

operating loss (NOL) carryover for subsequent years. See

Pub. 536, Net Operating Losses (NOLs) for Individuals,

Estates, and Trusts, for more information on NOL carryovers.

Use Form 461 to figure the excess business loss. See Who

Must File and the instructions for Line 16, later, to find where

to report the excess business loss on your return.

Who Must File

File Form 461 if you’re a noncorporate taxpayer and your net

losses from all of your trades or businesses are more than

$289,000 ($578,000 for taxpayers filing a joint return). A trust

subject to tax under section 511 should complete Form 461 if

it has a loss attributable to its trade or business of more than

$289,000. See

Definitions, later. Attach Form 461 to the

applicable tax return you file.

•

Form 1040, U.S. Individual Income Tax Return.

•

Form 1040-SR, U.S. Tax Return for Seniors.

•

Form 1040-NR, U.S. Nonresident Alien Income Tax

Return.

•

Form 1041, U.S. Income Tax Return for Estates and Trusts.

•

Form 1041-QFT, U.S. Income Tax Return for Qualified

Funeral Trusts.

•

Form 1041-N, U.S. Income Tax Return for Electing Alaska

Native Settlement Trusts.

•

Form 990-T, Exempt Organization Business Income Tax

Return (and proxy tax under section 6033(e)).

Definitions

Excess business loss. An excess business loss is the

amount by which the total deductions (computed without

regard to any deduction allowed under section 172 or 199A)

from your trades or businesses are more than your total gross

income or gains from your trades or businesses, plus the

threshold amount. Such excess losses should be determined

without regard to any deductions, gross income, or gains

attributable to any trade or business of performing services of

an employee.

Threshold amount. For 2023, the threshold amount is

$289,000 ($578,000 for taxpayers filing a joint return). These

amounts are indexed for inflation.

Treatment of capital gains and losses. Losses from sales

or exchanges of capital assets are not included in the

calculation of the total deductions from your trades or

businesses.

Gains from the sales or exchanges of capital assets

should not exceed the lesser of:

1. Capital gain net income limited to only gains and

losses attributable to a trade or business, or

2. Capital gain net income.

Trade or business. An activity qualifies as a trade or

business if your primary purpose for engaging in the activity

is for income or profit and you’re involved in the activity with

continuity and regularity. The facts and circumstances of

each case determine if an activity is a trade or business. The

regularity of activities and transactions and the production of

income are important elements. You don’t need to actually

make a profit to be in a trade or business as long as you have

a profit motive. However, you do need to make ongoing

efforts to further the interests of your business.

Note. If you own an interest in a partnership or S

corporation, the trade or business determination is made at

that entity's level.

Ordering Rules

First, apply the at-risk rules; next, apply the passive activity

loss rules; and then apply the excess business loss rules.

See the

Instructions for Form 6198, At-Risk Limitations. Also,

see Pub. 925, Passive Activity and At-Risk Rules.

Farming losses. Taxpayers with losses from a farming

business must apply the excess business loss limitation

before carrying any NOLs back 2 years. See the Instructions

for Form 1045, Application for Tentative Refund.

Farming and nonfarming losses. If you incur both farming

and nonfarming business losses that are more than the

threshold amount (see

Definitions, earlier), you must allocate

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the threshold amount first to the farming losses to the extent

you have an NOL.

Transition Rules

If you had losses or deductions that were limited under other

provisions of the Internal Revenue Code in prior tax years,

those losses or deductions are included in figuring the

amount, if any, of your excess business loss in the current

year.

Additional Information

See the following publications for more information about the

items in these instructions.

•

Pub. 225, Farmer’s Tax Guide.

•

Pub. 536, Net Operating Losses (NOLs) for Individuals,

Estates, and Trusts.

•

Pub. 925, Passive Activity and At-Risk Rules.

Specific Instructions

Joint returns. Complete one Form 461 containing all the

information for both spouses.

Amended returns. Attach Form 461 to any applicable

amended returns.

Part I—Total Income/Loss Items

Use Part I to report all the income and losses reflected on

your applicable tax return. If you’re filing a return other than

Form 1040 or 1040-SR, see the instructions below for the

specific line that’s an equivalent to the line on Form 1040 or

1040-SR. If the line instructions don’t reference a form listed

under

Who Must File, earlier, then it’s not applicable.

Line 1

Leave line 1 blank.

Line 2

Enter any business income or loss reported on Schedule 1

(Form 1040), line 3, or Form 1041, line 3.

Line 3

Enter any capital gains or losses reported on Form 1040 or

1040-SR, line 7; Form 1040-NR, line 7; Form 1041, line 4;

Form 1041-QFT, Part II, line 3; or Form 1041-N, Part II, line 3.

Losses from sales or exchanges of capital assets are not

included in the calculation of the total deductions from your

trades or businesses. So any such amounts included here in

line 3 should be added back on line 11 to remove them from

the computation.

Gains from the sales or exchanges of capital assets

should not exceed the lesser of capital gain net income

limited to only gains and losses attributable to a trade or

business, or capital gain net income. So any capital gains not

attributable to your trade or business that are included here in

line 3 should be added back on line 10 to remove them from

the computation.

Line 4

Enter any other gains or losses reported on Schedule 1

(Form 1040), line 4; Form 1041, line 7; Form 1041-QFT, Part

II, line 4; or Form 1041-N, Part II, line 4.

Line 5

Enter any supplemental income or loss reported on a

Schedule E, such as income from rental real estate, royalties,

partnerships, S corporations, estates, trusts, REMICs, etc.

This is reported on Schedule 1 (Form 1040), line 5; Form

1041, line 5; Form 1041-QFT, Part II, line 4; or Form 1041-N,

Part II, line 4.

Line 6

Enter any farm income or loss reported on Schedule 1 (Form

1040), line 6; Form 1041, line 6; Form 1041-QFT, Part II,

line 4; or Form 1041-N, Part II, line 4.

Line 7

Leave line 7 blank.

Line 8

Enter any other trade or business income, gain, or loss not

reported on lines 1 through 7 that you reported on your tax

return.

Line 9

Combine all the entries from lines 1 through 8 on line 9. The

resulting figure can be a positive or negative number.

Part II—Adjustment for Amounts not

Attributable to Trade or Business

Use Part II to report the income, gain, or loss from your tax

return that’s not from a trade or business. The information will

then be used to figure the excess business loss. See

Definitions, earlier.

Line 10

Enter the combined amount of income or gain you reported

on lines 1 through 8 above that’s not from a trade or

business. See Definitions, earlier. If you filed a tax return

other than a Form 1040, see the specific line references for

the tax return in the specific line instructions in

Part l, earlier.

Line 11

Enter the combined amount of losses or deductions you

reported on lines 1 through 8 above that’s not from a trade or

business. See the definition of a

trade or business, earlier. If

you filed a tax return other than a Form 1040, see the specific

line references for the tax return in the specific line

instructions in Part l, earlier.

Although losses and deductions are usually entered

as negative figures on other forms or worksheets,

enter them as a positive figure on this line.

Losses from sales or exchanges of capital assets are not

included in the calculation of trade or business deduction.

Such amounts included on line 3 should be added back here

to remove it from the computation.

Line 12

Subtract line 11 from line 10. The resulting figure is your gain

or loss that’s not from a trade or business. Use this amount in

Part III to figure your excess business loss. See Definitions,

earlier.

Part III—Limitation on Losses

Use Part III to apply the threshold limitation and figure the

excess business loss. See Definitions, earlier.

CAUTION

Instructions for Form 461 (2023)

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Line 14

Add lines 9 and 13. The resulting figure can be a positive or

negative number.

Line 16

If the resulting figure on this line is a negative amount, then

it’s your excess business loss. See Definitions, earlier.

Although it’s a loss, you will report the excess business loss

adjustment as a positive number on the “Other income” line

on your tax return and enter “ELA” on the dotted line. For

Schedule 1 (Form 1040), enter any excess business loss

adjustment on line 8p. The “Other Income” lines are located

on the following lines based on the type of tax return.

•

Form 1041, line 8.

•

Form 1041-QFT, Part II, line 4.

•

Form 1041-N, Part II, line 4.

•

Schedule A (Form 990-T), Part I, line 12 (applicable to

trusts only).

You’ll need to keep a record of your excess business

loss from each tax year because it’s treated as an

NOL carryover for subsequent taxable years. See

Pub. 536, Net Operating Losses (NOLs) for Individuals,

Estates, and Trusts for more information on NOL carryovers

and reporting NOLs on future tax year returns.

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Preparing the form. . . . . . . . 23 min.

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Instructions for Form 461 (2023)