Negative basis in business refers to the value of the equity investment in the company. It literally means you have no actual equity investment and worse you owe somebody money because other parties have fronted the necessary capital to make the business viable.
Code Section 465 of the Internal Revenue Code establishes the rules related to allowed losses. The code sets the ‘At-Risk Rules’ to assist taxpayers in establishing their basis in the business investment. The rules limit losses related to passive investors by utilizing the passive loss limits.
Code Section 465 of the Internal Revenue Code defines ‘At-Risk’ as the financial value the taxpayer has in jeopardy related to the business activity the taxpayer is invested in as some form of an owner. Effectively, the taxpayer may only take losses on his tax return contingent on the loss being directly tied to invested dollars with some form of tax basis.