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How do at-risk limits affect a closely held corporation?

The owners of closely held businesses in Texas often have a number of questions about taxes and how the federal tax code applies to them. For example, the tax code limits the ability of investors in many closely held corporations to claim a deduction for business losses.

The at-risk limits restrict the losses a business owner can deduct for a business activity to only the amount actually at risk for the specific activity in question. This rule applies to many closely held corporations, although not to S corporations.

According to IRS rules, a corporation is only considered closely held if more than 50 percent of the corporation's stock was held, directly or indirectly, by five or fewer people at any time during the preceding tax year. To determine if five or fewer individuals own 50 percent or more of all stocks, the following rules are applied.

First, those who hold stock directly or indirectly in a closely held corporation or partnership must consider the stock to be proportionately owned. Second, an individual can be considered the owner of stock that is actually owned directly or indirectly by a family member. This includes a spouse, a son or daughter, a sibling or a stepsibling. Third, if a person has an option to buy a stock, then that person is considered to be the owner of that stock for purposes of determining whether a corporation is closely held.

For many business owners tax rules seem like a maze that is difficult to escape. Rather than try to learn the intricacies of tax law, a business owner can instead concentrate on his or her business and rely on the advice of an experienced tax attorney. This professional can help the business owner year-round, not just during tax season.

Source: Internal Revenue Service, "Publication 542 - Main Content," Accessed on June 4, 2015

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