At-Risk Rules (IRC 465): How Much of Your Business Loss You Can Actually Deduct

By Yarik Yarosh, CPA ·September 5, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The at-risk rules under IRC 465 serve as the first layer of loss limitation for business owners. Before a business loss can be deducted, it must pass through four sequential gates: (1) the basis limitation (for S-Corps and partnerships), (2) the at-risk limitation (IRC 465), (3) the passive activity loss limitation (IRC 469), and (4) the excess business loss limitation (IRC 461(l), $305,000 single / $610,000 MFJ for 2025). A loss that passes one gate can still be stopped by the next. The at-risk rules prevent taxpayers from deducting losses that exceed their economic investment in the activity, targeting the use of nonrecourse financing to inflate deductions beyond the taxpayer’s actual exposure. The amount “at risk” includes cash contributed, the adjusted basis of property contributed, and amounts borrowed for which the taxpayer has personal liability (recourse debt). Nonrecourse debt (where the lender’s only recourse is the property itself) generally does NOT increase the at-risk amount, with a significant carve-out for qualified nonrecourse financing secured by real property.

✓Key takeaway

Loss limitation order (all four gates):

Gate	IRC Section	What It Limits	Applies To
1. Basis limitation	1366(d) (S-Corp), 704(d) (partnership)	Loss limited to stock/debt basis (S-Corp) or outside basis (partnership)	S-Corp shareholders, partners
2. At-risk limitation	465	Loss limited to amount at risk	All taxpayers in covered activities
3. Passive activity limitation	469	Passive losses only offset passive income	All taxpayers (except certain real estate professionals)
4. Excess business loss	461(l)	Net business loss limited to $305K/$610K (2025)	All non-corporate taxpayers

What increases and decreases the at-risk amount:

Increases At-Risk	Decreases At-Risk
Cash contributions	Distributions/withdrawals
Adjusted basis of property contributed	Deducted losses
Recourse borrowing (personally liable)	Nonrecourse debt (generally)
Income from the activity
Qualified nonrecourse financing (real estate only)

Qualified nonrecourse financing (the real estate exception):

Requirement	Details
Secured by real property	The financing must be secured by the real property used in the activity
Made by a qualified lender	Bank, savings institution, insurance company, pension fund, or government; NOT related parties or sellers
No personal liability	Borrower is NOT personally liable (nonrecourse)
Effect	Increases the at-risk amount despite being nonrecourse

How do at-risk rules interact with others?

Hypothetical example

Round numbers. A taxpayer invests in an S-Corp rental real estate business. The taxpayer contributes $100,000 in cash and the S-Corp borrows $400,000 from a bank (nonrecourse mortgage on the rental property). The S-Corp reports a $150,000 loss in Year 1.

Step 1: Basis limitation (IRC 1366(d))

Item	Amount
Stock basis (cash invested)	$100,000
Debt basis (taxpayer loaned to S-Corp?)	$0 (the bank loan is to the S-Corp, not from the shareholder)
Total basis	$100,000
S-Corp loss allocated	$150,000
Loss allowed (basis limitation)	$100,000 (limited to basis)
Loss suspended (basis)	$50,000

Note: For S-Corps, shareholder loans TO the corporation (not through the corporation) increase debt basis. Bank loans to the S-Corp do NOT increase shareholder basis (unlike partnerships, where partner’s share of partnership liabilities increases outside basis).

Step 2: At-risk limitation (IRC 465)

Item	Amount
Amount at risk	$100,000 (cash invested)
Qualified nonrecourse financing?	Yes (bank loan secured by real property)
Add: shareholder’s share of qualified nonrecourse debt	$400,000 x ownership %
However: S-Corp shareholders do NOT increase basis for entity-level debt	$0 additional basis
At-risk amount (after qualified nonrecourse)	$100,000 (only cash at risk; the S-Corp, not the shareholder, borrowed the money)
Loss allowed by at-risk rules	$100,000
Loss suspended (at-risk)	$0 (same as basis limitation, already limited to $100,000)

Key distinction: S-Corp vs. Partnership

Factor	S-Corp Shareholder	Partner in Partnership
Cash invested	Increases basis and at-risk	Increases basis and at-risk
Entity borrows from bank (recourse to entity)	Does NOT increase shareholder basis	Increases partner’s outside basis (per partnership’s share of recourse liabilities)
Entity borrows from bank (nonrecourse, real estate)	Does NOT increase shareholder basis	Increases partner’s outside basis (qualified nonrecourse financing on real estate)
Shareholder/partner loans to entity	Increases S-Corp debt basis	Increases outside basis
At-risk amount for bank debt	Only shareholder’s direct investment	Includes partner’s share of partnership liabilities

This is one of the most important structural differences between S-Corps and partnerships for real estate investors. Partnership investors get basis and at-risk credit for their share of partnership-level debt; S-Corp shareholders do not.

Partnership example (same facts):

Item	Partnership	S-Corp
Cash invested	$100,000	$100,000
Share of bank loan (50% partner)	$200,000	$0
Basis	$300,000	$100,000
At-risk (qualified nonrecourse)	$300,000	$100,000
Loss allocated ($150,000 x 50%)	$75,000	$150,000
Loss deductible	$75,000 (full amount)	$100,000 (limited to basis)

Step 3: Passive activity limitation (IRC 469) Assuming the $100,000 loss passes the at-risk test:

Item	Amount
Loss passing to passive activity rules	$100,000
Is the activity passive?	Yes (rental, per se passive under IRC 469(c)(2))
$25,000 rental loss allowance	Phase-out: AGI $200,000, allowance = $0 (phased out above $150,000 AGI)
Loss suspended (passive)	$100,000

Step 4: The loss is fully suspended

Gate	Loss Entering	Loss Allowed	Loss Suspended
Basis limitation	$150,000	$100,000	$50,000
At-risk limitation	$100,000	$100,000	$0
Passive activity limitation	$100,000	$0	$100,000
Net deductible loss		$0

Despite investing $100,000 and receiving a $150,000 allocated loss, the taxpayer deducts $0 in Year 1. The losses are suspended at two levels: $50,000 at basis, $100,000 at passive. The basis-suspended $50,000 will become available when basis increases (new contributions or S-Corp income). The passive-suspended $100,000 will become deductible when the taxpayer has passive income or disposes of the entire interest.

Increasing the at-risk amount (to unlock suspended losses):

Method	Effect
Invest more cash	Increases basis and at-risk
Personally guarantee the S-Corp loan	Does NOT increase S-Corp basis (IRS position)
Loan money directly to the S-Corp	Increases debt basis (but must be a real loan with documentation)
Convert to partnership/LLC	Entity-level debt then increases partner’s basis and at-risk
Generate activity income	Increases basis, reduces suspended losses

Illustrative numbers only, not a real client and not advice for your facts.

In what order do loss limitation rules apply?

Business losses must clear four successive hurdles before they can offset other income. First, the basis limitation: you can only deduct losses up to your tax basis in the business (for S-Corps, this includes stock basis and shareholder loan basis). Second, the at-risk rules (IRC 465): losses are limited to amounts you have at risk, which generally means cash invested plus recourse debt you’re personally liable for. Third, the passive activity rules (IRC 469): if you don’t materially participate, losses are passive and can only offset passive income. Fourth, the excess business loss limitation (IRC 461(l)): even if a loss clears the first three hurdles, the deduction is capped at $305,000 ($610,000 for joint filers in 2024), with the excess converted to a net operating loss carryforward.

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Cite this page

Yarik Yarosh, CPA. "At-Risk Rules (IRC 465): How Much of Your Business Loss You Can Actually Deduct." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-at-risk-rules-irc-465-loss-limitation

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.

At-Risk Rules (IRC 465): How Much of Your Business Loss You Can Actually Deduct

How do at-risk rules interact with others?

In what order do loss limitation rules apply?

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