What Is Tax Form 6198: At-Risk Limitations?

Tax Form 6198, At-Risk Limitations, is an Internal Revenue Service (IRS) form that enforces a rule preventing you from deducting a loss that exceeds the amount you are personally at risk of losing. This ensures that claimed losses from a business or investment are tied to your actual financial exposure.

Determining if You Need to File

You must file Form 6198 if you have a loss from a covered activity and have amounts for which you are not considered at risk. This requirement applies to individuals, estates, trusts, and certain C corporations, as well as partners and S corporation shareholders. If your activity generates a profit for the year, the form is not required. Form 6198 is attached to your primary tax return and is due by the same deadline, typically April 15.

The at-risk rules apply to activities conducted as a trade or business or for the production of income, including:

• Farming
• Holding mineral property
• Exploring for oil and gas
• Leasing certain types of equipment

The rules also cover any other business or income-producing activity not explicitly listed. An exception exists for holding real property, which can be financed by “qualified nonrecourse financing,” a type of debt that can be included in your at-risk amount even though you are not personally liable.

Calculating Your Amount at Risk

Your amount at risk represents your direct financial stake in an activity. The calculation begins with the money and adjusted basis of property you have personally contributed.

Your at-risk amount increases with any additional contributions of cash or property. It also increases by any funds borrowed for which you are personally liable, known as recourse debt. With recourse debt, a lender can pursue your personal assets if the loan is not repaid.

Conversely, your at-risk amount is decreased by any withdrawals or distributions you take from the activity. It is also reduced by prior-year losses that were allowed as deductions. A primary reduction comes from nonrecourse debt, which is debt you are not personally liable to repay. With nonrecourse debt, a lender can only seize the collateral securing the loan upon default.

For example, a $50,000 business loan secured only by business assets is a nonrecourse loan and does not increase your at-risk amount. If you personally guaranteed that same loan, it becomes recourse debt, and the $50,000 would be added to your amount at risk.

Completing Form 6198

A separate Form 6198 is required for each distinct at-risk activity. The form is structured into four parts to calculate your deductible loss.

Part I – Current Year Profit (Loss)

This part asks for a description of the activity and its overall profit or loss for the current tax year. You will report the gross income and deductions associated with the activity to determine your net figure.

Part II – Simplified Computation

This part offers a simplified computation for your at-risk amount. This method is only available for filers who meet specific criteria outlined in the form’s instructions.

Part III – Detailed Computation

In this section, you perform a detailed computation of your at-risk amount. You start with the amount from the beginning of the year, add any increases, and then subtract any decreases that occurred during the year.

Part IV – Deductible Loss

This final part determines your deductible loss for the year. Your at-risk amount from Part III is compared to the total loss from Part I, and your deductible loss is limited to the smaller of the two figures. Any loss that is not allowed is suspended and carried forward to the next tax year.