You can reduce income reported on your tax return by deducting allowable losses from a business or other for-profit activity, limited to the amount of money that you have at risk in the activity. The at-risk amount is equal to the amount of money and adjusted basis of property that you contribute to the activity, plus any debts you are legally obligated to pay.
The at-risk amount generally doesn’t include any amounts for which you are guaranteed against loss through nonrecourse financing, or any other loss-limiting arrangement. Nonrecourse financing is financing structured to ensure that lenders, in the event of default, can take only the assets pledged, and not the individual assets of the borrower.
The at-risk rules apply to:
Partners
S corporation shareholders
Estates and trusts
Closely held corporations (other than S corporations)
Taxpayers filing Schedule C, E, F, or Form 4835
If some of the money you invested isn’t at risk, use Form 6198 to determine your allowable loss.
For more information on at-risk limitations and Form 6198, see Explain This Form and IRS Instructions.