Tax Tip: Planning for the Excess Business Loss Rules

When the excess business loss—EBL—rules were enacted in 2017, they were game-changing.

The rules limit the use of EBLs to offset other income. Recent tax proposals would make the EBL rules permanent and would change the carryover of unused EBLs to remain EBLs instead of becoming net operating losses, or NOLs.

In the fund world, there generally are two management companies: one receiving management fees and oftentimes operating at a loss, and one receiving incentive allocations. In the context where a fund is considered to be an “investor” fund and not a “trader” fund, the results can be disastrous. Losses in the management company could be trapped. Under rules to date, any suspended EBLs would be considered to be NOLs in the next taxable year. So the consequences of being subject to the EBL rules were bad but generally were only a one-year limitation.

Planning for the EBLs rules may include a variety of methods. Fund managers need to be cognizant of the EBL rules and the potential negative tax consequences thereof, particularly if the proposed changes are enacted.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Phil Gross is a partner at Kleinberg Kaplan. He provides advice on federal, state, local and international tax issues concerning hedge funds, private equity funds and real estate funds, in addition to other myriad tax issues confronting business entities and individuals.

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