Include partnership/S-corp losses in loss_ald

changelog_entry.yaml

@@ -0,0 +1,4 @@
+- bump: patch
+  changes:
+    fixed:
+    - Include partnership/S-corp losses in business loss above-the-line deduction.

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

@@ -0,0 +1,147 @@
+- name: Case 1, S-Corp loss only.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: -50_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    loss_ald: 50_000
+
+- name: Case 2, S-Corp loss combined with SE loss.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: -30_000
+        self_employment_income: -20_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    loss_ald: 50_000
+
+- name: Case 3, losses exceeding section 461(l) cap for single filer.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: -200_000
+        self_employment_income: -200_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+        filing_status: SINGLE
+  output:
+    loss_ald: 305_000
+
+- name: Case 4, positive S-Corp income does not affect loss_ald.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: 100_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    loss_ald: 0
+
+- name: Case 5, no losses.
+  period: 2024
+  input:
+    people:
+      person1:
+        employment_income: 50_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    loss_ald: 0
+
+- name: Case 6, joint filing with losses exceeding joint cap.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: -400_000
+      person2:
+        self_employment_income: -300_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        filing_status: JOINT
+  output:
+    # Total losses = 400K + 300K = 700K, joint cap = 610K
+    loss_ald: 610_000
+
+- name: Case 7, mixed positive and negative across people.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: 200_000
+      person2:
+        partnership_s_corp_income: -100_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        filing_status: JOINT
+  output:
+    # The positive partnership income is still included in AGI separately,
+    # so the full 100K loss remains deductible.
+    loss_ald: 100_000
+
+- name: Case 8, capital loss combined with partnership loss.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: -50_000
+        short_term_capital_gains: -10_000
+    tax_units:
+      tax_unit:
+        members: [person1]
+        filing_status: SINGLE
+  output:
+    # limited_capital_loss = min(3_000, 10_000) = 3_000
+    # partnership loss = 50_000
+    # total = 50_000 + 3_000 = 53_000, below cap
+    loss_ald: 53_000
+
+- name: Case 9, business gains expand the allowed section 461(l) deduction.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: 400_000
+      person2:
+        partnership_s_corp_income: -1_100_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        filing_status: JOINT
+  output:
+    # Net business loss is 700K, so the 610K joint threshold still allows
+    # 400K of gain plus 610K of loss deductions in AGI.
+    loss_ald: 1_010_000
+
+- name: Case 10, capital losses sit outside the section 461(l) cap.
+  period: 2024
+  input:
+    people:
+      person1:
+        partnership_s_corp_income: -1_100_000
+        short_term_capital_gains: -10_000
+      person2:
+        partnership_s_corp_income: 400_000
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+        filing_status: JOINT
+  output:
+    # 1,010,000 of business loss is deductible under section 461(l), plus
+    # the separate 3,000 capital-loss deduction.
+    loss_ald: 1_013_000

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

@@ -53,10 +53,10 @@
     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
+    # loss_ald = 305_000 of allowed business loss + 3_000 of capital loss
+    # 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/wv/tax/income/credits/heptc/wv_homestead_excess_property_tax_credit.yaml

@@ -70,5 +70,7 @@
         members: [person1, person2]
         state_fips: 54
   output:
-    adjusted_gross_income: -3_000
+    # Partnership/S-corp losses are capped at the 610K joint section 461(l)
+    # threshold, with the separate 3K capital-loss deduction still allowed.
+    adjusted_gross_income: -613_000
     wv_homestead_excess_property_tax_credit: 0

policyengine_us/variables/gov/irs/income/taxable_income/adjusted_gross_income/above_the_line_deductions/loss_ald.py

@@ -6,17 +6,29 @@ class loss_ald(Variable):
     entity = TaxUnit
     label = "Business loss ALD"
     unit = USD
-    documentation = (
-        "Above-the-line deduction from gross income for business losses."
-    )
+    documentation = "Above-the-line deduction from gross income for business losses."
     definition_period = YEAR
-    reference = "https://www.law.cornell.edu/uscode/text/26/165"
+    reference = (
+        "https://www.law.cornell.edu/uscode/text/26/461#l",
+        "https://www.law.cornell.edu/uscode/text/26/461#l_4",
+    )
 
     def formula(tax_unit, period, parameters):
         filing_status = tax_unit("filing_status", period)
         max_loss = parameters(period).gov.irs.ald.loss.max[filing_status]
         person = tax_unit.members
         indiv_se_loss = max_(0, -person("self_employment_income", period))
         self_employment_loss = tax_unit.sum(indiv_se_loss)
+        indiv_se_gain = max_(0, person("self_employment_income", period))
+        self_employment_gain = tax_unit.sum(indiv_se_gain)
+        indiv_ps_loss = max_(0, -person("partnership_s_corp_income", period))
+        partnership_s_corp_loss = tax_unit.sum(indiv_ps_loss)
+        indiv_ps_gain = max_(0, person("partnership_s_corp_income", period))
+        partnership_s_corp_gain = tax_unit.sum(indiv_ps_gain)
+        business_loss = self_employment_loss + partnership_s_corp_loss
+        business_gain = self_employment_gain + partnership_s_corp_gain
+        allowed_business_loss = min_(business_loss, business_gain + max_loss)
         limited_capital_loss = tax_unit("limited_capital_loss", period)
-        return min_(max_loss, self_employment_loss + limited_capital_loss)
+        # Capital losses are deductible in AGI, but excluded from the
+        # section 461(l) excess business loss limitation.
+        return allowed_business_loss + limited_capital_loss

policyengine_us/variables/gov/states/dc/tax/income/additions/dc_self_employment_loss_addition.py

@@ -17,10 +17,15 @@ def formula(person, period, parameters):
         loss_person = max_(0, -person("self_employment_income", period))
         loss_taxunit = person.tax_unit.sum(loss_person)
         # Cap at SE loss actually deducted in federal AGI via loss_ald.
-        # loss_ald includes both SE and capital losses; isolate SE portion.
+        # loss_ald includes SE, partnership/S-corp, and capital losses;
+        # isolate SE portion.
         loss_ald = person.tax_unit("loss_ald", period)
         limited_capital_loss = person.tax_unit("limited_capital_loss", period)
-        se_loss_in_ald = max_(0, loss_ald - limited_capital_loss)
+        ps_loss = max_(0, -person("partnership_s_corp_income", period))
+        ps_loss_taxunit = person.tax_unit.sum(ps_loss)
+        se_loss_in_ald = max_(
+            0, loss_ald - limited_capital_loss - ps_loss_taxunit
+        )
         effective_loss = min_(loss_taxunit, se_loss_in_ald)
         p = parameters(period).gov.states.dc.tax.income.additions
         addition_taxunit = max_(