Who is subject to the S Corp At-Risk Rules?

All individual S corporation shareholders are subject to the at-risk rules. This includes partners in partnerships and members of LLCs taxed as S corporations. The rules apply to most trade or business activities and activities for the production of income, with certain exceptions like real estate activities before 1987.

How do S Corp shareholders determine their 'at-risk' amount?

An S corp shareholder's at-risk amount generally includes their cash contributions, the adjusted basis of property contributed, and amounts borrowed for use in the activity for which they are personally liable or have pledged property not used in the activity as security. Nonrecourse debt, unless secured by real property, typically does not increase the at-risk amount. Refer to IRS Publication 925 for detailed guidance.

What types of debt increase an S Corp shareholder's at-risk amount?

Recourse debt, where the shareholder is personally liable for repayment, increases the at-risk amount. Additionally, nonrecourse debt secured by property not used in the activity can increase the at-risk amount. However, qualified nonrecourse financing for real estate activities is a specific exception that can increase at-risk amounts, as per IRC Section 465(b)(6).

What types of debt do NOT increase an S Corp shareholder's at-risk amount?

Nonrecourse debt for which the shareholder is not personally liable generally does not increase the at-risk amount. This also includes amounts protected against loss through guarantees, stop-loss agreements, or similar arrangements. Loans from related parties or those with a personal guarantee from another shareholder may also be scrutinized.

How do S Corp losses interact with the at-risk rules?

S corp losses are first limited by the shareholder's stock and debt basis (IRC Section 1366(d)). Any losses remaining are then subject to the at-risk limitations. Losses disallowed by the at-risk rules are suspended and carried forward indefinitely to future years when the shareholder's at-risk amount increases.

What IRS forms are required to report at-risk amounts?

S corporation shareholders typically report their at-risk amounts on Form 6198, 'At-Risk Limitations.' This form is filed with their individual income tax return (Form 1040). The S corporation itself reports income and losses on Form 1120-S, and shareholders receive Schedule K-1 (Form 1120-S) detailing their share of these items.

Are there any dollar limits to the at-risk rules?

There are no specific dollar limits on the amount of losses that can be disallowed by the at-risk rules. The limitation is based entirely on the shareholder's individual at-risk amount. If a shareholder has zero at-risk, then 100% of their losses will be disallowed until their at-risk amount increases.

Can suspended at-risk losses be carried forward indefinitely?

Yes, losses disallowed by the at-risk rules can be carried forward indefinitely. These suspended losses can be deducted in any future year in which the shareholder's at-risk amount for that activity increases. This allows taxpayers to eventually utilize legitimate losses when their economic exposure is restored.

How do distributions from an S Corp affect the at-risk amount?

Distributions from an S corporation generally reduce a shareholder's at-risk amount. This is because distributions reduce the shareholder's economic investment in the business. If distributions exceed the at-risk amount, it can create or increase suspended losses.

What are common mistakes S Corp shareholders make regarding at-risk rules?

Common mistakes include failing to track their at-risk basis accurately, incorrectly including nonrecourse debt in their at-risk amount, and not understanding the interplay between basis limitations and at-risk limitations. Another frequent error is overlooking the impact of distributions on the at-risk amount. Consulting IRS Publication 925 can help avoid these pitfalls.

What are audit red flags related to S Corp at-risk rules?

Significant S corp losses claimed by shareholders with minimal or negative at-risk amounts are major red flags. Large nonrecourse debt reported as increasing at-risk, or inconsistent reporting of at-risk amounts year-over-year without clear justification, can also trigger an IRS audit. Lack of proper documentation for at-risk calculations is another common issue.

How do the at-risk rules interact with the passive activity loss (PAL) rules?

The at-risk rules (IRC Section 465) apply before the passive activity loss (PAL) rules (IRC Section 469). Losses must first clear the at-risk hurdle before being tested under the PAL rules. If a loss is disallowed by the at-risk rules, it is suspended and does not flow through to the PAL limitations until a future year when the at-risk amount increases.

Are there any exceptions to the at-risk rules for S Corps?

While generally applicable, there are limited exceptions. Certain equipment leasing activities conducted by closely held corporations may be exempt under IRC Section 465(c)(4). Additionally, the at-risk rules do not apply to the holding of real property placed in service before 1987, although qualified nonrecourse financing for real estate is a specific inclusion.

How do shareholder loans to an S Corp affect the at-risk amount?

Shareholder loans to an S corporation generally increase the shareholder's at-risk amount, provided the shareholder is personally liable for the loan. This is because the loan represents an additional economic investment. However, loans from third parties guaranteed by the shareholder may not always increase the at-risk amount without careful structuring.

What happens if an S Corp shareholder's at-risk amount becomes negative?

An S corp shareholder's at-risk amount cannot become negative. If distributions or other reductions exceed the at-risk amount, the at-risk amount is reduced to zero, and any excess losses are suspended. This ensures that the deduction limit never falls below zero, preventing deductions beyond actual economic exposure.

Can an S Corp shareholder increase their at-risk amount to deduct suspended losses?

Yes, an S corp shareholder can increase their at-risk amount in subsequent years to utilize suspended losses. This can be done by making additional cash contributions, contributing more property, or converting nonrecourse debt to recourse debt. Any increase in the at-risk amount allows for the deduction of previously suspended losses up to the new at-risk limit.

Are there any proposed 2026 law changes affecting S Corp at-risk rules?

As of now, there are no specific proposed 2026 law changes directly targeting the S Corp at-risk rules (IRC Section 465). The at-risk rules are a long-standing anti-abuse provision. However, broader tax reform discussions could indirectly impact their application or interaction with other provisions.

How do the at-risk rules apply to S Corp shareholders who materially participate?

Material participation (relevant for passive activity loss rules) does not exempt an S corp shareholder from the at-risk rules. Even if a shareholder materially participates, their losses are still limited by their at-risk amount. The at-risk rules are a primary limitation, followed by the passive activity loss rules.

Where can I find official IRS guidance on S Corp at-risk rules?

Official IRS guidance on S Corp at-risk rules can be found in IRC Section 465 and IRS Publication 925, 'Passive Activity and At-Risk Rules.' These resources provide comprehensive details on calculating at-risk amounts, applying the limitations, and reporting requirements. Consulting a qualified tax professional is also highly recommended for specific situations.

S-Corp At-Risk Rules — Complete 2026 Guide

Q: What are the S Corp At-Risk Rules?

The S Corp At-Risk Rules, outlined in IRC Section 465, limit the amount of losses an S corporation shareholder can deduct to their economic investment in the business. This prevents taxpayers from deducting losses exceeding the amount they could actually lose. It's a crucial anti-abuse provision designed to ensure tax deductions reflect real financial exposure.

S-Corp At-Risk Rules for Shareholders: A Comprehensive 2026 Guide

Understanding the S-Corp at-risk rules is crucial for shareholders looking to deduct losses from their S corporation. These rules, governed by Internal Revenue Code (IRC) Section 465, prevent taxpayers from deducting losses exceeding their actual economic investment in an activity. For the 2026 tax year, while there haven't been sweeping changes to the fundamental at-risk principles, a thorough understanding remains essential for compliance and maximizing allowable deductions.

What are the S-Corp At-Risk Rules?

The at-risk rules limit the amount of loss (including deductions and credits) that a taxpayer can deduct from certain activities to the amount of money and basis in property they have personally invested and are therefore “at risk” of losing. For S corporation shareholders, this means that deductible losses passed through from the S corporation are limited to the shareholder’s adjusted basis in their stock and any direct loans made to the corporation. These rules are designed to prevent taxpayers from deducting losses that are financed by nonrecourse debt or other arrangements where the taxpayer is not personally liable for repayment.

Who Qualifies for the At-Risk Rules?

The at-risk rules apply to individuals, including S corporation shareholders, and certain closely held C corporations. Specifically, an S corporation shareholder is subject to these rules if they are claiming a deduction for their share of an aggregate loss from an S corporation. This includes situations where losses were not allowed in a prior year due to basis limitations and are being carried forward. The rules also apply if a shareholder received a non-dividend distribution from an S corporation, disposed of stock, or received a loan repayment from the S corporation.

How to Claim the S-Corp At-Risk Deduction

S corporation shareholders use Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, to calculate their stock and debt basis and determine the potential limitations of their share of the S corporation’s deductions, credits, and other items. This form replaced the previous three-part worksheet for figuring shareholder basis. The process generally involves:

Calculating Stock Basis: This begins with your initial investment (cost) in the S corporation stock, adjusted annually for income, losses, and distributions. Increases to basis include all income (tax-exempt and taxable) reported on Schedule K-1 (Form 1120-S). Decreases include property distributions, nondeductible expenses, and losses/deductions reported on Schedule K-1.
Calculating Debt Basis: This refers to direct loans made by the shareholder to the S corporation. It is tracked separately from stock basis. Loan basis is increased by additional loans and decreased by repayments and certain losses.
Applying Limitations: Losses are first limited by stock basis, then by debt basis. Any losses exceeding these amounts are suspended and carried forward indefinitely, to be deducted in a later year when sufficient basis is restored.
Reporting: The final allowable losses, after applying basis and at-risk limitations, are reported on the shareholder’s individual tax return (Form 1040, Schedule E).

It is important to note that Form 7203 is filed by S corporation shareholders who are claiming a deduction for their share of an aggregate loss from an S corporation, received a non-dividend distribution, disposed of stock, or received a loan repayment from an S corporation. Even if not required to be filed, it may be beneficial for shareholders to complete and retain Form 7203 to ensure their bases are consistently maintained year after year [1].

2026 Limits, Amounts, or Rates

For the 2026 tax year, the fundamental at-risk rules under IRC Section 465 remain consistent. The primary limitation is that a shareholder's deductible loss cannot exceed their amount at risk. The amount at risk generally includes:

Cash contributions to the S corporation.
The adjusted basis of property contributed to the S corporation.
Amounts borrowed for use in the activity for which the taxpayer is personally liable for repayment or has pledged property (other than property used in the activity) as security.
For real estate activities, qualified nonrecourse financing secured by real property used in the activity.

It is crucial to distinguish between stock and debt basis (calculated on Form 7203) and the at-risk amount (calculated on Form 6198). While closely related, they are distinct limitations applied in a specific order. Losses are first limited by basis, then by the at-risk amount, and finally by passive activity rules (Form 8582) and excess business loss limitations (Form 461) [2].

Common Mistakes That Cost Taxpayers Money

Ignoring Basis Limitations: Many shareholders fail to accurately track their stock and debt basis, leading to disallowed losses or incorrect reporting.
Confusing Basis with At-Risk: While related, these are separate limitations. A shareholder can have sufficient basis but not enough at-risk amount, or vice-versa.
Not Documenting Loans: Informal loans to an S corporation without proper documentation (e.g., promissory notes) may not be considered debt basis by the IRS, limiting deductible losses.
Incorrectly Calculating At-Risk Amounts: Failing to properly account for nonrecourse debt or other arrangements where the shareholder is not personally liable can lead to errors.
Overlooking Form 7203 Requirements: Not filing Form 7203 when required, or not maintaining accurate records to support the figures on the form, can result in IRS scrutiny and penalties.

IRS Code Section Reference

The S-Corp at-risk rules are primarily governed by Internal Revenue Code (IRC) Section 465, Deductions Limited to Amount at Risk. Additionally, IRC Section 1366(d) addresses the limitation on losses and deductions for S corporation shareholders based on their stock and debt basis.

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References

[1] Instructions for Form 7203 (Rev. December 2022). Internal Revenue Service. https://www.irs.gov/pub/irs-pdf/i7203.pdf

[2] Publication 925 (2025), Passive Activity and At-Risk Rules. Internal Revenue Service. https://www.irs.gov/publications/p925

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S Corp At Risk Rules

S-Corp At-Risk Rules for Shareholders: A Comprehensive 2026 Guide

What are the S-Corp At-Risk Rules?

Who Qualifies for the At-Risk Rules?

How to Claim the S-Corp At-Risk Deduction

2026 Limits, Amounts, or Rates

Common Mistakes That Cost Taxpayers Money

IRS Code Section Reference

Ready to Optimize Your S-Corp Tax Strategy?

References

S Corp At Risk Rules FAQs

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