Question about "Investment at Risk" with Schedule C

[avigo45]

I am taking a loss for one of my Schedule C small business in 2022. I am being asked if "All investment is at risk", "Some investment is not at risk" or "not applicable" 

What does this mean? What should I choose here?

Thank you

[MonikaK1]

If you have a business loss and amounts invested in the business for which you are not at risk, you may need to apply a limitation that could reduce your deductible loss. The at-risk rules generally limit the amount of loss (including loss on the disposition of assets) you can claim to the amount you could actually lose in the business.

Amounts not at-risk include the following:

• Nonrecourse loans used to finance the business, to acquire property used in the business, or to acquire the business that are not secured by your own property (other than property used in the business). However, there is an exception for certain nonrecourse financing borrowed by you in connection with holding real property.
• Cash, property, or borrowed amounts used in the business (or contributed to the business, or used to acquire the business) that are protected against loss by a guarantee, stop-loss agreement, or another 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, or who is related under section 465(b)(3)(C) to a person (other than you) having such an interest.

If you didn't borrow funds to finance the business or its assets under circumstances such as these, then you can answer "All investment is at risk".

See IRS Publication 925 and this TurboTax tips article for more information regarding the at-risk rules.

[Edited 03/24/23| 2:23pm PDT] 

@avigo45 (edited) 

[avigo45]

Thanks. The business is a pretty simply retail model and in 2022 my general expenses were higher than my gross income so I'm taking loss. I did not borrow any funds. 

So in that instance would "not applicable" be correct?

[AliciaP1]

No, the only was your investment is not at risk at all is if the business has provided guarantees to cover your losses for you so that you never experience one.  Most small businesses (especially Schedule C filers) are 100% at risk.  See At-Risk Investment for more details.

@avigo45 

[avigo45]

I'm confused now. The first response said that "not applicable" should be chosen if I did not borrow any money (which I did not). 

So you're saying I should choose "all investment is at risk" even if I did not borrow any money?

In this scenario, what is "investment" referring to in relation to a loss? 

[MinhT1]

You should answer that All investment is at risk because you are bearing the loss and nobody is bearing the loss for you.

Investment here means the money you have invested in the business.

[avigo45]

Thank you. Still a little confused by @MonikaK1 response

[GeorgeM777]

To follow-up on the prior posts from @MonikaK1 and AliciaP1, your investment in your business is all at risk if there is no one, or no entity, that will cover your business losses.  For example, if you had some type of insurance that would compensate you for your loss, or even some percentage of your loss, such as the losses you have incurred in 2022,  then it would be fair to say that your investment is not all at risk.  If that were the case, then you would select "some of my investment is not at risk." Usually, when the losses have to come out of your own pocket, then that means your investment is all at risk.  

The non-recourse loan referenced in a prior post is a type of loan where the borrower is not liable for repayment.  If your business capital was funded in whole or in part with non-recourse loans, then your business investment would not be all at risk.  

The not applicable category assumes that there could be business situations where risk is not relevant, although, given your situation, it appears risk is relevant because you have a loss.

Thus, if there is no one, or no entity to compensate you for the business losses you have incurred in 2022, then your investment in your business is all at risk. 

@avigo45