Four Tiers of Loss Limitations: A Guide to the New Rules for Pass-Through Entities

103  |  TSCPA In Person Events  |  Basic  |  Scheduled


Owners of S corporations and partnerships are subject to numerous limitations on pass-through losses, each with unique rules, applications, and complexities. With the increase in popularity of pass-through business entities, it is essential for CPAs to understand the complexities and interactions of these pass-through loss limitations.


Number of Credits Type of Credits
4 Taxes
3.33 CLE


Basic familiarity with loss allowance rules of pass-through entities


* Tier 1: Basis limitations for S corporation shareholders and partners
* Tier 2: §465 at-risk limitations for S corporation shareholders and partners, including the impact of debt, indemnities, guarantees, and shareholder/partner agreements
* Tier 3: §469 passive loss limitations and exceptions to the limitations
* Tier 4: The new excess business loss limitation of the Tax Cuts and Jobs Act of 2017 (new §461(l))


* Analyze how basis in an ownership interest in a pass-through entity is established
* Discuss how activity of the entity, distributions, and optional adjustments increase or decrease basis
* Discuss when basis is “at-risk” under §465, and the resulting loss disallowance and carry forward related to basis that is not at-risk
* Define passive activities under §469 and exceptions to the passive loss rules
* Discuss when and how aggregation of activities should be used to avoid the passive loss rules
* Analyze new §461(l) created by the Tax Cuts and Jobs Act of 2017 and understand the limitation calculation and resulting carry forward
* Analyze the hierarchy of the loss limitations with examples of the application of the four tiers of losses and how they interact


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Susan Smith, CPA

Susan Smith manages her own firm specializing in tax planning for individuals and business owners and is also a frequent speaker at tax conferences.

Smith was a Senior Manager in the tax departments of Price Waterhouse and Peat Marwick (the predecessor of KPMG). While at Price Waterhouse, she also held the national specialist designation for the real estate and partnership tax practices. During her time at Peat Marwick, Smith led the real estate and tax practices locally. She was an associate adjunct professor at Widener University in the master’s taxation program. Her ratings have consistently exceeded 4.7 on a scale of 5.0. Also, she recently received the James L. McCoy 2008 Discussion Leader of the Year Award for excellence in teaching.

Smith earned her Bachelor of Business Administration degree, with an accounting concentration, from the University of Toledo.

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