At risk limitation and how it prevents claiming deductions

The at risk rules place limitations on a taxpayer’s ability to claim certain deductions. More exactly, deductions for losses stemming from a trade or business, or an activity for the production of income are limited to the amount “at risk.” The “amount at risk” is basically the amount of capital and the adjusted basis of property contributed to the activity. A taxpayer generally is also at risk for amounts borrowed to fund the business or investment activity if the taxpayer is personally liable for repayment or has pledged property unrelated to the activity under consideration as collateral to securitize borrowed funds unless, however, the taxpayer is in reality insulated against losses. A taxpayer may additionally be at risk where qualified nonrecourse financing for real estate is utilized.

Who is subject to these at risk rules? Individuals, partners, S corporation shareholders, estates, trusts and certain closely held C corporations are subject to the at risk rules.