What are At-Risk Rules?
The at-risk rules deal with your investment in an activity. They are designed to prevent you from claiming losses in excess of amounts you actually stand to lose (your investment). Only the amount of your investment that is at risk counts towards your at-risk basis ( also called your tax basis).
For example, if in tax year 2013 you invested $10,000 in cash to an S corporation, your tax basis in 2013 would be $10,000.
If the S corporation has a $12,000 loss in 2013, the maximum amount of the loss you could claim would be $10,000, the amount of your tax basis. In addition, your tax basis would be reduced by the $10,000 loss resulting in a zero tax basis.
In the previous example, since your 2013 tax basis was only $10,000 at the time of the $12,000 loss, the extra $2,000 of loss cannot be claimed in 2013. The excess $2,000 loss is called a suspended loss and may be carried over to future years indefinitely and deducted only when you have sufficient tax basis to claim the loss.
For example, if in 2014 you invested an additional $2,000 in your S corporation, your tax basis would increase from zero in 2013 to $2,000 in 2014. Therefore, in 2014 you would have sufficient basis to claim the $2,000 suspended loss.
If you have a business loss and if any part of your investment in the business is not at risk, you must complete Form 6198, At-Risk Limitations.
- Return to the Tax Basics for Startups Table of Contents to find related links.