Material participation by an investor?

Assume that an investor meets the guidelines for material participation in a business. While materially participating in the business, the investor does two things: 1) the investor expends his own funds to complete projects for this for this company, and 2) provides funds to help the company meet its expenses. Subsequently, the business closes. How does the materially participating investor categorize and deduct his losses?

If the business is structured as flow-through (S corp, partnership, sole proprietorship), then the investor could deduct those costs as incurred as unreimbursed business expenses. These would be deducted as an offset to the flow-through income pickup on the investor's Schedule E.

If the business is a C corporation, then the losses are probably capital.

Those expenses are added to his inside basis in the company and ultimately could result in a capital loss when the company dissolves.