Tax Facts

7901 / Does the “at risk” limitation on losses apply to individual investors in an equipment leasing program? If so, what effect will it have?

Yes, the “at risk” rules will apply unless the investment is in an entity taxed as a C corporation, other than a closely-held corporation (generally, more than 50 percent control by 5 or fewer owners). The “at risk” rules will not apply to a closely-held corporation’s equipment leasing activities if 50 percent or more of the corporation’s gross receipts are attributable to equipment leasing1 (see Q 8004).

In general, the “at risk” rules limit the deduction an investor may claim for the investor’s share of net losses generated by an equipment leasing program to the amount he or she has at risk in that program. The rules do not prohibit an investor from offsetting his or her share of the deductions generated by the program against the income received from that program. For a detailed explanation of the operation of the at risk limitation, see Q 8006 to Q 8009.

Put as simply as possible, an investor is initially “at risk” to the extent that the investor is not protected against the loss of money or other property he or she contributes to the program. For the specifics as to how an investor’s “amount at risk” is calculated, see Q 8005.

1.  See IRC §§ 465(a)(1), 465(c)(4).

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