supdat wrote:Putting aside the question of state tax, none of the other itemized deductions should be business.
Chay wrote:The rest of the itemized deductions are taken against nonbusiness income.
That's right. Nonbusinesss deductions are allowed in computing an NOL to extent that there is nonbusiness income.
26 USC 172(d)(4). Continuing with the same example as I used before, another way to think of this is to separate the income and deductions into two categories:
- Code: Select all
Nonbusiness Income
23,000 Pension
(23,800) Nonbusiness itemized deductions
800 Adjustment for limitation on nonbusiness itemized deductions
--------
0 Total net nonbusiness income
Business Income
2,194 Net profit from Schedule C
(155) SE Tax deduction
(2,200) State tax deduction erroneously treated as 100% business-related
--------
(161) Total net business income
Combining the two categories gives us a (161) NOL, which is the same result we had before.
Nilodop wrote:... the 2,200 state tax should be allocated between business and nonbusiness income..How do you determine the amount of state income taxes to use in the NOL calculation? It has to be otherwise deductible, which causes you to determine the amount that couldn't be deducted because of the $10,000 TCJA limit. Yes?
The Code, Regulations, and Publication 536 don't tell us how to do this. I did it proportionally in my example because that seemed the most reasonable way.
In the case that state and local income taxes plus property taxes exceed $10,000, I have only this to go by:
26 USC 164(b)(6) wrote:the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return).
I think there is another general principle that taxpayers are allowed to, but not required to, take all deductions they are entitled to (except in certain cases impacting SE tax and EITC). I know this has been debated previously here. If this is true, I could take the state income tax into account
first, before considering just enough property tax to bring the total to $10,000. In other words, all of the state income tax, up to $10,000 total, would be considered for purposes of computing an NOL. I freely admit I don't have much support for this position, but it seems the most reasonable to me.