What Are the Section 58 Loss Limitations for AMT?

Section 58 of the Internal Revenue Code limits the deduction of specific losses when calculating the Alternative Minimum Tax (AMT). Individuals with particular investments or business activities might face these limitations. These rules ensure that the tax benefits from certain losses do not disproportionately reduce a taxpayer’s liability under this parallel tax calculation.

The Alternative Minimum Tax Framework

The United States tax code includes a parallel tax system known as the Alternative Minimum Tax (AMT). Its purpose is to ensure that individuals and corporations with high economic income pay a specified minimum amount of tax. The AMT achieves this by disallowing certain deductions and tax-preference items that are permissible under the regular tax system, preventing taxpayers from leveraging numerous deductions to eliminate their tax liability entirely.

The calculation begins with a taxpayer’s regular taxable income, which is then adjusted to arrive at Alternative Minimum Taxable Income (AMTI). This process involves “adding back” various deductions that are not allowed for AMT purposes, like certain itemized deductions from Schedule A of Form 1040. After these adjustments, a specific AMT exemption amount is subtracted from the AMTI. For 2025, the exemption is projected to be $88,100 for single filers and $137,000 for married couples filing jointly, though these amounts phase out at higher income levels. The taxpayer pays the higher of the regular tax or the tentative minimum tax.

Specific Loss Limitations for AMT

Internal Revenue Code Section 58 imposes specific limitations on certain losses for calculating the Alternative Minimum Tax. These rules prevent taxpayers from using losses from certain activities to offset other income in the AMT calculation, even if those losses are deductible for regular tax purposes. The limitations primarily target passive activity losses and tax shelter farm losses, which are treated more stringently under the AMT framework.

Passive Activity Losses

For AMT purposes, the rules for passive activity losses under Section 469 are applied with modifications. A passive activity is any rental activity or a trade or business in which the taxpayer does not materially participate. While the regular tax code allows up to $25,000 in losses from rental real estate activities for certain taxpayers, this deduction is disallowed for AMT. The calculation of passive activity losses for AMT must be refigured by taking into account all other AMT adjustments, such as recalculating depreciation using AMT methods. The difference between the passive loss allowed for regular tax and the refigured amount for AMT becomes an adjustment on the AMT form.

Tax Shelter Farm Losses

The code disallows any loss from a “tax shelter farm activity” when computing AMTI for non-corporate taxpayers. A tax shelter farm activity is defined as any farming syndicate or any other farming activity that is considered a passive activity. If a farming venture is a tax shelter or if the taxpayer does not materially participate, any resulting loss cannot be used to reduce alternative minimum taxable income. This rule prevents investors from using farm losses, generated through accelerated depreciation, to shelter other income from the AMT.

Insolvency and At-Risk Rules

The loss limitation rules are subject to an exception for insolvency. A taxpayer who is insolvent—meaning their liabilities exceed the fair market value of their assets—can deduct these otherwise disallowed losses to the extent of their insolvency. This provision prevents the AMT from imposing a tax liability on individuals in financial distress. The at-risk rules of Section 465 also apply in the AMT context, limiting a deductible loss to the amount personally invested, and must be applied using AMT-adjusted figures.

Calculating the Tax Adjustment

Calculating the tax adjustment for these losses involves a re-computation of the allowable deductions under AMT rules and reporting the difference on Form 6251, Alternative Minimum Tax—Individuals. Taxpayers must recalculate the entire gain or loss from the specific activity by first applying all other relevant AMT adjustments. This includes refiguring depreciation using the slower methods required for AMT and accounting for any other preference items related to the activity.

For passive activities, a taxpayer may need to complete a separate version of Form 8582, Passive Activity Loss Limitations, for AMT purposes. This AMT version of the form will use income and loss figures that have already been adjusted for AMT. The difference between the passive activity loss allowed on the regular tax Form 8582 and the loss allowed on the AMT version is then entered on Form 6251.

For tax shelter farm losses, the gain or loss must be refigured taking into account all AMT adjustments. If the activity is passive, it is included in the overall passive activity adjustment; if not, the adjustment is figured separately. Any loss from a tax shelter farm activity is not allowed for AMT unless the taxpayer is insolvent. The difference between what the regular tax system allows and what the AMT system permits becomes a positive adjustment to taxable income for AMT purposes.

Carryover of Disallowed Losses

Losses disallowed in the current year for Alternative Minimum Tax purposes are not permanently lost but are carried forward to subsequent tax years. This carryover mechanism allows the taxpayer to use the disallowed loss as a deduction in a future year. The deduction can only be used against income generated by the same activity that produced the loss, such as a disallowed passive farm loss offsetting passive farm income.

This process of disallowing a loss in one year and allowing it in another creates a “timing difference” between the regular tax and AMT systems. When a taxpayer pays AMT due to these timing differences, they may be eligible for a minimum tax credit, calculated on Form 8801. The credit is designed to refund the extra tax paid in a prior year when the timing differences that caused the AMT liability reverse.

The amount of the disallowed loss from the current year becomes part of the basis for calculating the minimum tax credit carryforward. In a future year, when the taxpayer does not have an AMT liability, they can use this credit to reduce their regular tax liability. This ensures that, over time, the taxpayer is not taxed twice on the same income due to the differing rules of the two tax systems.