Final answer:
Taxpayers face limitations related to the(1) basis, (2) at-risk amounts, and (3) passive activity losses that serve to prevent abuse of tax shelters but may also impede the potential to fully offset legitimate business losses. Hence, all the given options are correct.
Step-by-step explanation:
Understanding the limitations of basis, at-risk, and passive loss rules is important for tax considerations, especially related to investments and business activities.
To start, the basis limitation implies that a taxpayer's potential loss or deduction is limited to their investment in the entity. This means the losses one can claim can't exceed the amount they have put into the investment.
Next, the at-risk limitation further restricts loss deductions to the amount that the taxpayer has at risk, which includes actual cash, property invested, and certain borrowed amounts for which the taxpayer is personally liable.
Lastly, passive loss limitations restrict tax deductions for losses from passive activities, typically those in which the taxpayer does not materially participate, against other forms of active or portfolio income.
A strength of these approaches is they prevent taxpayers from claiming excessive losses that do not economically affect them, hence reducing potential tax shelters.
However, the limits can also restrict the ability to offset legitimate business-related losses against other income sources, which can be perceived as a drawback.