AT RISK RULE Meaning and
Definition
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The "at risk rule" is a legal and accounting principle that governs the deductibility of losses incurred in business activities. Under this rule, a taxpayer may deduct losses from a trade or business, rental activities, or investments only if they are considered to be "at risk" of losing their investment.
In essence, the at risk rule ensures that taxpayers can only deduct losses to the extent that they have personally invested in a venture and are exposed to the potential risks and liabilities associated with that investment. It aims to prevent taxpayers from claiming losses that they have not actually risked, thereby ensuring the integrity of the tax system.
To meet the at risk rule's requirements, a taxpayer must have a genuine economic stake in the activity and must be personally liable for the debts and obligations related to the investment. This means that if the investment fails or incurs losses, the taxpayer would be financially responsible and stand to lose their own capital.
The at risk rule serves as a safeguard against abusive tax practices by discouraging taxpayers from artificially creating losses or investing in transactions solely for the purpose of obtaining tax deductions. It helps maintain fairness and equity in the tax system by ensuring that deductions are reserved for legitimate business activities where individuals truly bear the economic risks.
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