The at-risk rules may limit the amount of loss you can deduct from investment in your closely held corporation. The amount of loss a corporation may recognize from an activity is limited to the amount that is at risk for that activity at the close of the tax year. Any losses limited by the at-risk rules are not forfeited – they are carried forward and may be used in a later year when you obtain a sufficient amount at risk to cover it.
The amount you have at risk in an activity includes the cash and property you contribute to it, amounts borrowed for use in the activity if the corporation is liable for repayment, and amounts borrowed for use in the activity to the extend the corporation has pledged property other than property used in the activity as security for the borrowed amount (to the extent of the net FMV of the corporation’s interest). With respect to the contributed property, however, you count the basis you had in it, not its value. That is, if you contributed land with a basis (cost) of $10,000 and a value of $25,000, your at-risk amount will only be $10,000, not $25,000 value.
Unfortunately, these rules are not the only ones that may limit your tax benefits from losses in your closely held corporation. You may also be subject to rules limiting losses claimed from passive activities. Additionally, if you hold your interest as a partner or S corporation shareholder, your losses may be limited to your basis in your interest under special rules applicable to partnerships and S corporations.
These loss limitation rules are complex and may be further complicated by how they interrelate. Please contact us if you have any questions on how these rules may apply to your specific situation.