Business Operations in South Africa (Portfolio 7350)


Jennifer Roeleveld

Emeritus Professor

University Of Cape Town

At a glance

I. History of At-Risk Legislation
II. Overview of At-Risk Rules
III. Taxpayers Subject to the At-Risk Rules
IV. Activities to Which the At-Risk Rules Apply
V. Determining Separate Activities
VI. Determining the Amount at Risk
VII. Qualified Nonrecourse Financing
VIII. Effect of Transfer/Disposition of Activity on Amount at Risk
IX. At-Risk Limitation on Property-Based Tax Credits


Bloomberg Tax Portfolio, At-Risk Rules, No. 550, analyzes the rules that limit the deductibility of loss from an activity to the amount with respect to which a taxpayer is “at-risk.” Congress enacted the at-risk rules in response to the widespread use of nonrecourse debt to create tax losses in excess of a taxpayer’s actual cash investment in an activity.

Generally, the at-risk rules apply to all individuals and to closely-held C corporations in which five or fewer individuals own more than 50% of the stock. Although the at-risk rules do not technically apply to S corporations and partnerships/LLCs, the at-risk rules do apply to S corporation shareholders as well as to partners/members in partnerships/LLCs. Losses attributable to “qualified businesses” conducted by “qualified C corporations” are exempt from the at-risk rules.

A taxpayer’s at-risk amount includes the amount of money and the adjusted basis of other property the taxpayer contributes to the activity. Amounts borrowed for use in an activity are included in the at-risk amount to the extent the taxpayer is personally liable for repayment or has pledged property other than property used in the activity as security for the debt.

A taxpayer is not considered at risk with respect to amounts borrowed in connection with certain activities if funds are borrowed from a person who has an interest in the activity other than a creditor interest. A taxpayer is also not considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop-loss agreements, or other similar arrangements.
A special rule applies with respect to certain nonrecourse loans that are incurred in connection with the activity of holding real property. A taxpayer is considered to be at risk for its share of “qualified nonrecourse financing” which is secured by real property used in the activity. This portfolio provides a thorough discussion of this important exception.

Taxpayers may carry forward losses suspended under the at-risk rules indefinitely. The taxpayer may use the disallowed loss in a subsequent year when the taxpayer has a sufficient at-risk amount. In addition, a taxpayer may use suspended losses to offset any gain recognized upon disposition of the investment activity.

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