Fourth in a Series of In-Depth Discussions About AGC’s Tax Priorities for 2025

AGC previously reported about certain tax provisions, included in the 2017 Tax Cuts and Jobs Act (TCJA), that are important to the construction industry which are set to expire. The past few weeks have focused on the Section 199A “qualified business income deduction” and the ability of businesses to fully deduct the cost of equipment in the year that it is purchased, and increasing the "small contractor exemption" from the percentage of completion method of accounting. This section will focus on how the tax code limits the ability of contractors to "carry back" losses, and how this negatively impacts the industry.

During consideration of the TCJA, Congress added a provision to limit the ability of pass-through businesses to deduct losses in any given year. If a pass-through business owner incurred losses that exceeded $250,000 (individuals) or $500,000 (joint filers), those losses now have to carry over to the next year (and beyond if the losses are substantial enough) under Section 461(l). While AGC opposed the inclusion of this provision in TCJA, the overall package had other offsetting benefits for the same businesses.

Importantly, this provision was temporarily waived in the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 as a recognition that, at least at the outset of the global pandemic, it appeared that construction would be heavily impacted and incur significant losses. Absent this waiver, C-Corporations would have enjoyed the ability to “carryback” their losses, but pass-through businesses would not. This fundamental inequity resulted in what should have been a good precedent for emergency, countercyclical tax relief—i.e. providing both corporate and non-corporate taxpayers the ability to recoup their losses in the year they are incurred, provide an infusion of cash into struggling businesses, and keeping them afloat during an economic downturn.

Unfortunately, this commonsense policy became politicized during COVID, and became a frequent target to be used as a “pay-for” for other priorities. Under the TCJA, Section 461(l) expired in 2025 along with the other “individual” provisions. But the American Rescue Plan Act, and later the Inflation Reduction Act extended the expiration date to 2028.

The excess loss limitation is particularly impactful for the construction industry because it is inherently a cyclical business sector. When the economy expands, private and public sector owners tend to make infrastructure investments, while in times of economic downturn, those investments can dry up. Some construction firms were able to stay afloat during the Great Recession between 2008-2012 in part due to their ability to carry-back losses and provide the added tax refunds into funding their operations during the downturn.

Importantly, even under the restrictions of 461(l), losses can still be carried forward, indefinitely. As a result, this policy is mostly a timing shift for when revenue is collected, not a permanent loss in revenue to the Treasury. AGC is urging Congress to reconsider the utility of this provision in the context of other expiring provisions in 2025 and consider whether it should be continued.

For additional information please contact Matthew Turkstra.