At risk means you are using your own money (or borrowed funds if personally liable) for the business.
A loss may only be deducted up to the amount you personally have at risk, and no more. If a loss exceeds your at-risk investment, the excess is called a suspended loss and may be deducted in a future year, indefinitely, until you have sufficient at-risk basis to absorb the loss.
Amounts invested in the business for which you would NOT be at risk may include the following:
- Non-recourse loans used to finance the business
- Cash, property or borrowed amounts used in the business that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).
- Amounts borrowed for use in the business from a person who has an interest in the business, other than as a creditor.
In other words, if you have absolutely no money at risk in your business, you may not deduct any part of a Schedule C loss. The amount of a loss you may deduct must be equal to or less than the amount you personally stand to lose.
