Implement Section 461(l) excess business loss limitation

changelog.d/section-461l.added.md

@@ -0,0 +1 @@
+Implement Section 461(l) excess business loss limitation for modeled business-loss sources, including partnership/S-corp, farm, rental, estate, and Form 4797 items.

policyengine_us/parameters/gov/irs/gross_income/sources.yaml

@@ -4,8 +4,9 @@ values:
     - irs_employment_income
     - self_employment_income
     - partnership_s_corp_income
-    - farm_income
+    - farm_operations_income
     - farm_rent_income
+    - other_net_gain_gross_income
     - capital_gains
     - taxable_interest_income
     - rental_income

policyengine_us/tests/policy/baseline/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/loss_ald.yaml

@@ -0,0 +1,313 @@
+# Tests for Section 461(l) excess business loss limitation
+# Reference: https://www.law.cornell.edu/uscode/text/26/461#l
+
+- name: S-corp loss with Section 461(l) limitation (from issue #7015)
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 26
+        partnership_s_corp_income: -419_487
+        short_term_capital_gains: -111_233
+        long_term_capital_gains: -1_187
+        taxable_interest_income: 10
+        is_tax_unit_head: true
+      person2:
+        age: 27
+        employment_income: 82_813
+        partnership_s_corp_income: -419_487
+        short_term_capital_gains: -111_233
+        long_term_capital_gains: -1_187
+        taxable_interest_income: 10
+        is_tax_unit_spouse: true
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    spm_units:
+      spm_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: RI
+  output:
+    # Total S-corp loss: -838,974
+    # Section 461(l) threshold for MFJ 2024: $610,000
+    # Limited business loss: $610,000
+    # Capital losses: 224,840 (111,233 + 1,187) * 2 = 224,840
+    # Limited capital loss: $3,000 (Section 1211 limit)
+    # Total loss_ald: 610,000 + 3,000 = 613,000
+    # Gross income: 82,813 + 20 (interest) = 82,833
+    # AGI: 82,833 - 613,000 = -530,167
+    loss_ald: 613_000
+    adjusted_gross_income: -530_167
+
+- name: Self-employment loss under Section 461(l) threshold - single filer
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        self_employment_income: -100_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Business loss: $100,000
+    # 461(l) threshold for single 2024: $305,000
+    # Loss is under threshold, so full deduction
+    loss_ald: 100_000
+
+- name: Combined SE and S-corp loss exceeding Section 461(l) threshold
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        self_employment_income: -200_000
+        partnership_s_corp_income: -200_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Total business loss: $400,000
+    # 461(l) threshold for single 2024: $305,000
+    # Limited to threshold
+    loss_ald: 305_000
+
+- name: Business income offsets business losses before Section 461(l) cap
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        self_employment_income: -500_000
+        partnership_s_corp_income: 300_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Business income: $300,000
+    # Business loss: $500,000
+    # 461(l) threshold for single 2024: $305,000
+    # Max deductible business loss: 300,000 + 305,000 = 605,000
+    # Full $500,000 loss is deductible
+    loss_ald: 500_000
+    adjusted_gross_income: -200_000
+
+- name: Business losses plus capital losses - limits apply separately
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        self_employment_income: -400_000
+        short_term_capital_gains: -50_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Business loss: $400,000
+    # 461(l) threshold for single 2024: $305,000
+    # Limited business loss: $305,000
+    # Capital loss: $50,000
+    # Limited capital loss: $3,000 (Section 1211)
+    # Total: $305,000 + $3,000 = $308,000
+    loss_ald: 308_000
+    limited_capital_loss: 3_000
+
+- name: Farm loss is subject to Section 461(l) limitation
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        farm_operations_income: -500_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Farm loss: $500,000
+    # 461(l) threshold for single 2024: $305,000
+    # Limited to threshold
+    loss_ald: 305_000
+    adjusted_gross_income: -305_000
+
+- name: Qualified rental loss is subject to Section 461(l) limitation
+  # Schedule E rental losses are included in the Section 461(l) bucket.
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        rental_income: -500_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Qualified rental loss: $500,000
+    # 461(l) threshold for single 2024: $305,000
+    # Limited to threshold
+    loss_ald: 305_000
+    adjusted_gross_income: -305_000
+
+- name: Estate loss is subject to Section 461(l) limitation
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        estate_income: -500_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Estate/trust loss: $500,000
+    # 461(l) threshold for single 2024: $305,000
+    # Limited to threshold
+    loss_ald: 305_000
+    adjusted_gross_income: -305_000
+
+- name: Other net gain offsets business losses before Section 461(l) cap
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        self_employment_income: -500_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+        other_net_gain: 300_000
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # Business loss: $500,000
+    # Other net gain: $300,000
+    # 461(l) threshold for single 2024: $305,000
+    # Max deductible business loss: 300,000 + 305,000 = 605,000
+    # Full loss is deductible, and the gain is included in gross income.
+    loss_ald: 500_000
+    adjusted_gross_income: -200_000
+
+- name: MFJ gets higher Section 461(l) threshold
+  period: 2024
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        partnership_s_corp_income: -500_000
+        is_tax_unit_head: true
+      person2:
+        age: 38
+        is_tax_unit_spouse: true
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+    spm_units:
+      spm_unit:
+        members: [person1, person2]
+    households:
+      household:
+        members: [person1, person2]
+        state_code: TX
+  output:
+    # Business loss: $500,000
+    # 461(l) threshold for MFJ 2024: $610,000
+    # Under threshold, so full deduction
+    loss_ald: 500_000
+
+- name: Section 461(l) sunsets after 2026 (infinite threshold)
+  period: 2027
+  absolute_error_margin: 1
+  input:
+    people:
+      person1:
+        age: 40
+        partnership_s_corp_income: -1_000_000
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+    spm_units:
+      spm_unit:
+        members: [person1]
+    households:
+      household:
+        members: [person1]
+        state_code: TX
+  output:
+    # No 461(l) limitation after 2026
+    loss_ald: 1_000_000

policyengine_us/tests/policy/baseline/gov/irs/irs_gross_income.yaml

@@ -8,6 +8,26 @@
   output:
     irs_gross_income: 1 + 2 + 3 + 4
 
+- name: IRS gross income includes farm operations income.
+  period: 2022
+  input:
+    farm_operations_income: 100
+  output:
+    irs_gross_income: 100
+
+- name: IRS gross income includes positive other net gain.
+  period: 2022
+  input:
+    people:
+      person1:
+        is_tax_unit_head: true
+    tax_units:
+      tax_unit:
+        members: [person1]
+        other_net_gain: 100
+  output:
+    irs_gross_income: 100
+
 - name: Tax unit with tax-exempt pension income as sole income source.
   absolute_error_margin: 0.01
   period: 2021

policyengine_us/tests/policy/baseline/gov/states/dc/tax/income/dc_self_employment_loss_addition.yaml

@@ -53,10 +53,12 @@
     state_code: DC
   output:
     # limited_capital_loss = min(3_000, 5_000) = 3_000
-    # loss_ald = min(305_000, 25_000_000 + 3_000) = 305_000
-    # SE portion of loss_ald: 305_000 - 3_000 = 302_000
-    # DC addition: max(0, 302_000 - 12_000) = 290_000
-    dc_self_employment_loss_addition: 290_000
+    # Section 461(l) caps the business-loss portion at 305,000.
+    # Capital losses are capped separately under Section 1211 and added on top.
+    # loss_ald = 305_000 + 3_000 = 308_000
+    # SE portion of loss_ald: 308_000 - 3_000 = 305_000
+    # DC addition: max(0, 305_000 - 12_000) = 293_000
+    dc_self_employment_loss_addition: 293_000
 
 - name: Case 7, SE loss exactly at DC threshold.
   absolute_error_margin: 0.01

policyengine_us/tests/policy/baseline/gov/states/mi/tax/income/mi_household_resources.yaml

@@ -53,8 +53,10 @@
     state_code: MI
   output:
     # Per MI-1040CR-7 Line 22: "If negative, enter 0"
-    # Rental income floored at 0, so only employment income counts
-    mi_household_resources: 50_000
+    # Rental income floored at 0 for the MI source line,
+    # but federal above_the_line_deductions includes loss_ald of 30,000.
+    # Total: 50,000 - 30,000 = 20,000
+    mi_household_resources: 20_000
 
 - name: Large capital gains loss limited to 3000
   period: 2024

policyengine_us/tests/policy/baseline/gov/states/wv/tax/income/credits/heptc/wv_homestead_excess_property_tax_credit.yaml

@@ -70,5 +70,13 @@
         members: [person1, person2]
         state_fips: 54
   output:
-    adjusted_gross_income: -3_000
+    # AGI calculation with Section 461(l):
+    # - Partnership/S-corp loss: 2 * 727,887.75 = 1,455,775.50
+    # - Limited by Section 461(l) for MFJ: $610,000
+    # - Capital loss: 2 * 896,056.95 = 1,792,113.90
+    # - Limited by Section 1211: $3,000
+    # - Gross income: ~$0.02 (interest only)
+    # - loss_ald = 610,000 + 3,000 = 613,000
+    # - AGI = 0 - 613,000 = -613,000
+    adjusted_gross_income: -613_000
     wv_homestead_excess_property_tax_credit: 0