At-Risk Limitation Rules for S-Corporation Owners

What Is the At-Risk Limitation?

The at-risk limitation determines how much of your S-Corporation losses you can deduct on your U.S. tax return.
In simple terms:
You can only deduct losses up to the amount you have personally “at risk” in the business. This rule exists to prevent taxpayers from deducting losses they’re not financially responsible for. For expat business owners, this rule often becomes confusing — especially when businesses are funded from abroad or structured across borders.

What Counts as “At Risk” for S-Corp Owners

You are generally considered at risk for:

Cash you personally invest in the business

Property you contribute

Loans you personally guarantee

You are not at risk for:

Business loans you did not personally guarantee

Losses allocated beyond your actual financial exposure

Certain relatedparty or foreign loans

This distinction matters because losses exceeding your at-risk amount are suspended, not lost — but they cannot be deducted until your at-risk amount increases.

Why At-Risk Rules Are Tricky for Expats

Expats often face additional complexity due to:

Example:

An American living abroad funds an S-Corp using a foreign bank loan that is not personally guaranteed. Even though the business incurs losses, those losses may not be deductible under at-risk rules.
This is where many expats unintentionally overclaim losses — and later face IRS adjustments.

At-Risk Limitation vs. Basis Limitation

Many S-Corp owners confuse basis rules with at-risk rules — but they are separate tests.
You must pass both:

Failing either test means your loss deduction is limited.
Understanding the order and interaction of these rules is essential for proper planning.

What Happens to Disallowed Losses?

If your losses exceed your at-risk amount:

Strategic planning — such as additional capital contributions or restructuring loans — can often unlock suspended losses legally.

Smart Planning Strategies for Expat S-Corp Owners

Proper planning can make a significant difference. Strategies may include:

The goal is not just compliance — it’s maximizing allowable deductions without triggering IRS scrutiny.

How We Help Expat Business Owners