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Need Some Deductions for 2011?

Don't overlook these!

10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Business Structures

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What Are At-Risk Rules?

The at-risk rules are designed to prevent you from claiming losses in excess of amounts you actually stand to lose.

Only the amount of your investment that is at risk counts towards your at-risk basis which is also called your tax basis.

Sole proprietorships:

If you're a sole proprietor, your entire investment is at risk. Therefore, if you suffer a business loss, the loss is fully deductible against your other sources of income.

On Schedule C, line 32a there's a box for you to check off if all your investment is at risk. Place a checkmark in this box.

S-corporations:

If you invest in an S-corporation or partnership, the amount of a loss incurred by these entities may be limited to the amount of your investment you actually stand to lose; this is referred to as your at-risk basis or tax basis.

Example

In tax year 2011 you invest $10,000 in cash in an S-corporation.
Your tax basis in 2011 would be $10,000, the amount of your investment you are actually at risk of losing.
In 2011 the S-corporation has a $12,000 loss.

Result:

For tax year 2011, the maximum amount of the loss you could claim would be $10,000, the amount of your tax basis.
Your tax basis would be reduced by the $10,000 loss, resulting in a zero tax basis.
Since your 2011 tax basis was only $10,000 at the time of the $12,000 loss, the remaining $2,000 of the loss cannot be claimed in 2011.
The remaining $2,000 loss is called a suspended loss.

Suspended losses:

The suspended $2,000 loss may be carried over to future years indefinitely and deducted in a year you have sufficient tax basis to absorb the loss.

Increasing your tax basis:

Continuing with the above example, say you invested an additional $2,000 in the S-corporation in 2012.

Your tax basis in 2012 would be $2,000, up from zero in 2011.

Therefore, in 2012 you would have a sufficient tax basis to claim the $2,000 suspended loss carried over from 2011.

Form 6198:

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.

Passive Activity Rules

If you merely invest in a business and do not actively participate in the day-to-day operations, losses are classified as passive losses.

Passive losses may only be deducted from passive income.

If a passive loss exceeds passive income in any tax year, the excess loss may be carried over to the following tax year.

More about passive activity rules.

S-corporations: Your Tax Basis; Your Stock Basis (S-corporation); Adjusting Your Stock Basis; Why Annual Stock Basis Adjustments Are Made

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