At-Risk & Passive Activity: At-Risk & Passive Activity Limitations
Quick answer
Business losses must clear limits in order: basis, the at-risk amount under IRC §465, the passive activity rules under §469, then the §461(l) excess business loss limit. At-risk amounts include cash, property and recourse debt but generally exclude nonrecourse debt. Passive losses, from activities without material participation, generally offset only passive income. Amounts disallowed at each stage carry forward.
At-Risk & Passive Activity Limitations is tested on EA Exam Part 2 (Specialized Business Topics). Primary IRS reference: IRC §465.
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About this EA exam topic
At-risk and passive-activity limitations stack on top of basis to limit business losses. The at-risk rules limit losses to amounts the taxpayer could actually lose; the passive rules limit losses from activities without material participation.
The EA exam tests the ordering: basis limit, then at-risk, then passive-activity limits, and the carryforward of amounts disallowed at each stage.
What you'll be tested on
- At-risk amount and what increases/decreases it
- Ordering of basis, at-risk, and passive limits
- Carryforward of disallowed losses
- Nonrecourse vs. recourse financing in at-risk
How to prepare
- Apply the limits in order: basis → at-risk → passive.
- Remember most nonrecourse debt is not at-risk.
- Track separate carryforwards for each limitation.
Practice questions for At-Risk & Passive Activity Limitations
What this topic covers
At-Risk & Passive Activity Limitations appears in Part 2: Business Taxation within the Specialized Business Topics domain. VantageEA practice questions focus on how at-risk & passive activity rules are applied in realistic EA exam fact patterns.
What candidates practice
Candidates practice identifying tested facts, choosing the best multiple-choice answer, and reviewing explanations tied to IRC §465, IRC §469. This topic supports timed 100-question PSI-style mock tests and shorter topic review sessions.
Related practice-question themes include at-risk, passive-activity, loss-limitations, material-participation.
Frequently asked questions
How do at-risk and passive rules interact?
Losses pass the basis limit, then the at-risk limit, then the passive-activity limit; amounts disallowed at any stage carry forward.
Which part?
Part 2 (Businesses).
Reference?
IRS Publication 925.
Continue studying
More Specialized Business Topics topics from Part 2
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S Corporation: S Corp Income/Loss & Distributions
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Sole Proprietorship: Sole Proprietorship / Schedule C
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Accounting Methods: Accounting Methods & Periods
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Business Credits & COD: Business Credits & Cancellation of Debt
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