What are At-Risk Rules?
The at-risk rules deal with you investment in an activity.
The at-risk rules 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 which is also called your tax basis.
For example, if in tax year 2012 you invest $10,000 in cash in an S corporation, your tax basis would be $10,000.
If the S corporation has a $12,000 loss in 2012, 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 $10,000 resulting in a zero tax basis.
Since your 2012 tax basis was only $10,000 at the time of the $12,000 loss, the extra $2,000 of loss cannot be claimed in 2012.
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 2013 you invested an additional $2,000 in your S corporation, your tax basis would increase from zero in 2012 to $2,000 in 2013.
Therefore, in 2013 you would have sufficient basis to claim the $2,000 suspended loss carried over from 2012.
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.