With respect to various types of activities, you may be limited to the amount of losses you can deduct by the at-risk rules. The at-risk rules limit your losses from most activities to your amount at risk in the activity. You treat any loss that is disallowed because of the at-risk limits as a deduction from the same activity in the next tax year. If your losses from an at-risk activity are allowed, they are subject to recapture in later years if your amount at risk is reduced below zero.
The at-risk rules apply to (1) individuals (including partners and S shareholders); (2) certain closely held C corporations; and (3) estates and trusts. They do not apply to S corporations. A corporation is subject to the at-risk rules only if, at any time during the last half of the tax year, more than 50 percent in value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals.
The at-risk rules apply to (1) farming, (2) exploring for or exploiting oil and gas resources, (3) holding, producing, or distributing motion picture films or videos, (4) equipment leasing, (5) exploring for, or exploiting geothermal deposits, and (6) any other activity engaged in by the taxpayer in carrying on a trade or business or for the production of income. In the case of a closely held corporation actively engaged in equipment leasing, the equipment leasing activity is treated as a separate activity and losses from that activity are not subject to the at-risk rules.
Generally, you are considered at risk for (1) money and the adjusted basis of property contributed to an activity; and (2) amounts borrowed with respect to an activity. You are considered at risk with respect to amounts borrowed for use in an activity to the extent that you are personally liable for the repayment of such amounts, or have pledged property (other than property used in the activity or business) as security for the borrowed amount (to the extent of the net fair market value of your interest in the property).
As you might expect, there is far more to the at-risk rules than we can cover in this short summary. Please call me at your convenience so that we can discuss how these rules may apply in your particular situation.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 04102021 DFA 320-850)