Inter-relation of "At-risk" rules and "Passive Loss" rules
The "passive loss" rules are applied AFTER the "at-risk" rules and all other tax code rules concerning the calculation of income from a trade or business. Therefore:
Calculate the net income of the relevant trade or business activity applying all the applicable rules, such as which income is included and excluded, what expenditures can be deducted, etc. If the trade or business is operated by a conduit entity, calculate the amounts to be passed through to the various owners. These are the same calculations, applying the same rules, as would be done if "at-risk" and "passive loss" did not exits.
If the result is net income, there is no need to be concerned with either passive loss or at-risk rules.
If the result is a net loss, calculate the taxpayer's amount at-risk in the particular trade or business.
If the taxpayer's amount at-risk is less than the amount of loss, the loss to be used in further calculations is limited to the amount at-risk. Any amount disallowed at this point is carried forward under the at-risk rules.
The amount of loss that remains deductible after application of the at-risk rules is then used to determine the taxpayer's passive income or loss.
If the taxpayer has a net passive income, it is included at the appropriate point in the taxpayer's gross income.
If the taxpayer has a net passive loss, apply the passive loss rules to determine the tax treatment of that loss.