Under Section 465, aggregated activities for at-risk purposes are two or more ventures that a taxpayer combines and treats as a single activity, so that one at-risk amount and one loss calculation cover the whole group. Aggregation is available in specific situations: it is elective for four of the five categories the statute names, mandatory for section 1245 property leased in the same year by a partnership or S corporation, and available for other trades or businesses when the taxpayer actively participates or when a 65% loss-allocation test is met. When it applies, income and at-risk basis from profitable ventures can absorb losses that would otherwise be suspended in a losing venture.
Why the Grouping Decision Matters
The default rule cuts against aggregation. For the five categories the statute enumerates, each individual property or venture is its own separate activity: each film, each farm, each oil and gas property, each geothermal property, and each piece of leased section 1245 property.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk Separate treatment means separate at-risk calculations, separate suspended-loss tracking, and no automatic netting between them.
Run two farms, and losses of $80,000 in one do not offset $100,000 of income in the other for at-risk purposes. The losing farm needs its own at-risk basis to absorb the deduction, or the loss gets suspended and carried forward until basis grows. Aggregation is the escape hatch, and whether you can use it depends on which category the activity falls into and how you participate in it.
Aggregating the Five Enumerated Categories
Partners in a partnership and shareholders in an S corporation may elect to aggregate multiple ventures within a single category and treat them as one activity. Under the temporary Treasury regulations, this permissive aggregation covers four of the enumerated categories: films and video tapes, farming, oil and gas, and geothermal deposits.2eCFR. 26 CFR 1.465-1T – Aggregation of Certain Activities (Temporary) The word “may” in the regulation is doing real work. A partner holding an interest in a partnership that operates three farms can choose one activity or three; the choice is not forced.
Leasing of section 1245 property is different. When a partnership or S corporation places section 1245 property in service, all such properties placed in service during the same taxable year of the entity are automatically treated as a single activity. That grouping is built into the statute and is not elective.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk Properties placed in service in different years remain separate activities.
The statute also says that rules similar to the aggregation rules for non-enumerated activities apply to the enumerated ones, so the active-participation and 65% tests described below can serve as an additional basis for grouping enumerated ventures.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
Aggregating Other Trade or Business Activities
For activities outside the five enumerated categories, Section 465(c)(3)(B) offers two paths. Multiple activities that together constitute a single trade or business are treated as one activity if either of the following is true:1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
- The taxpayer actively participates in the management of the trade or business.
- The trade or business is carried on by a partnership or S corporation, and 65% or more of the losses for the tax year are allocable to persons who actively participate in the management of the business.
Neither the statute nor any regulations define “actively participates in the management” for this purpose. In practice, the IRS and courts look at day-to-day involvement, participation in significant business decisions, and performance of services. Passive investors who write checks and read quarterly statements are unlikely to qualify.
The 65% test is recalculated every year, so a group that qualifies in one year can fall out in the next when losses shift among partners. Three retail locations held through a partnership can be treated as one activity only in a year when the active managers’ share of losses clears the threshold.
Congress directed Treasury to issue regulations on when non-enumerated activities should be aggregated or separated, and no final regulations have been issued. That leaves genuine ambiguity for activities that do not fit cleanly into either path.
How Aggregation Works Inside a Pass-Through Interest
A partner’s or S corporation shareholder’s entire interest in a single entity is generally treated as one activity for at-risk purposes. If the partnership runs a restaurant, a catering operation, and a food truck, the shareholder does not automatically get three separate at-risk calculations for the K-1 items. The interest is one activity unless a specific rule forces separation.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
The forced-separation rule kicks in when the entity operates in two or more of the five enumerated categories. If a partnership farms and also leases equipment, the farming activities and the leasing activities stay separate, because Congress prescribed distinct treatment for each category. You cannot pool a farming at-risk basis with an equipment-leasing at-risk basis simply because both arrive on the same K-1.
What Aggregation Does to Losses and At-Risk Basis
Aggregation pools the at-risk amounts and the operating results of the combined ventures. That is the point, and it is also the risk.
Take two equipment-leasing ventures held through the same partnership. Venture A produces a $50,000 loss, and Venture B produces $75,000 of income. Aggregated, the combined activity shows $25,000 of net income and no Section 465 limitation applies. Kept separate, the $50,000 loss is deductible only up to your at-risk amount in Venture A alone. If that basis is $10,000, only $10,000 of the loss comes through, and $40,000 is suspended and carried forward indefinitely, waiting for Venture A’s at-risk amount to grow.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
The downside is quieter but real. Aggregation can mask a declining position in one component because the pooled at-risk amount still looks healthy. If the group is later disaggregated because facts have changed, one component may turn out to have a negative at-risk balance that triggers recapture income.
Once activities are aggregated, a single at-risk computation runs on Form 6198. The starting at-risk amount for the combined activity equals the sum of the individual at-risk amounts of each component immediately before aggregation.3Internal Revenue Service. Instructions for Form 6198 From that point on, income, contributions, and qualifying borrowing from any component increase the single figure; losses, distributions, and withdrawals from any component decrease it. Suspended losses from before the aggregation carry into the combined activity and become deductible as soon as the pooled at-risk amount can absorb them.
Making, Keeping, and Revoking the Choice
Where aggregation is elective, the taxpayer signals the choice through the reporting position on the return. Form 6198 is filed per activity, so a single Form 6198 covering several ventures reflects a decision to aggregate; separate forms reflect the decision to keep them apart.4Internal Revenue Service. About Form 6198, At-Risk Limitations
Consistency matters after the position is taken. The IRS expects the grouping to hold from year to year, and revoking it generally requires a material change in the facts and circumstances of the business, not a realization that a different grouping would produce a better tax result. If three consulting practices were aggregated because they shared management and clients, one of them turning unprofitable is not, on its own, grounds to disaggregate and isolate the loss.
If a group is disaggregated because circumstances truly changed, the combined at-risk basis is allocated back to the individual activities based on the taxpayer’s economic interest in each.
Recapture Risk in a Pooled Activity
Section 465(e) requires the taxpayer to include a negative at-risk amount in gross income for the year, up to the total losses previously deducted from the activity minus any recapture income already recognized. This typically happens when a distribution or withdrawal pushes the balance below zero.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
The recaptured amount becomes a deduction for the same activity in the next tax year, waiting for at-risk basis to rebuild. The loss is not lost; it is timed differently, with income accelerated into one year and a matching deduction suspended until the following year.
For aggregated groups, a single large distribution tied to one component can drag the entire pool’s at-risk amount negative, triggering recapture even when most components are performing well. That is a specific reason to think carefully before aggregating ventures with very different cash-flow profiles.
Aggregation Here Is Not the Same as Grouping Under the Passive Loss Rules
Section 465 and Section 469 both limit losses, and both let taxpayers combine activities, but the two decisions are independent. The at-risk limitation applies first; only losses that survive Section 465 move on to the passive activity analysis. Two activities can be aggregated for at-risk purposes under Section 465 and grouped differently for passive activity purposes under the regulations at Treasury Regulation 1.469-4. You are not required to use the same boundaries for both provisions, and the best grouping for one may be wrong for the other.
Compliance Exposure
Incorrect aggregation, an inflated at-risk amount, or a missed recapture can produce an accuracy-related penalty of 20% of the resulting tax underpayment. The IRS applies the penalty when the error reflects negligence or disregard of the rules, or when the underpayment crosses the substantial understatement threshold, defined as the greater of 10% of the tax that should have been shown on the return or $5,000 for individuals.5Internal Revenue Service. Accuracy-Related Penalty
Aggregation is audit-prone because the line between one trade or business and several separate activities is often genuinely unclear, especially for non-enumerated activities where Treasury has never finalized regulations. If you are aggregating on the active-participation test, document your involvement: meeting notes, operational decisions, time logs, and evidence of management control. The absence of clear regulatory guidance leaves the IRS room to take a narrow view, and the taxpayer carries the burden of showing the grouping is correct.