Form 6198 (At-Risk Limitations)

Form 6198: At-Risk Limitations is used to calculate how much loss you can deduct from certain business or investment activities. The IRS “at-risk” rules limit your deductible losses to the amount of money and property you have personally at risk in an activity.

Why Form 6198 Matters

The IRS does not allow you to deduct unlimited losses from investments or businesses if you are not financially liable for those losses. Form 6198 ensures that:

• You only deduct losses up to what you could actually lose
• Excess losses are carried forward to future tax years
• Your deductions comply with at-risk limitations under Internal Revenue Code Section 465

Who Needs to File Form 6198?

You must file Form 6198 if you have a loss from an activity subject to at-risk rules and you are not fully at risk for your investment.

Common situations that trigger Form 6198 include:

• Partnership or S corporation investments reported on Schedule K-1
• Rental real estate losses
• Business losses where financing is nonrecourse (you are not personally liable)

What Is “At Risk”?

You are considered at risk for amounts that you could actually lose in the activity, including:

• Cash you invested
• Property you contributed (adjusted basis)
• Loans you are personally liable for (recourse debt)

You are not at risk for:

• Nonrecourse loans (unless qualified for real estate rules)
• Amounts protected by guarantees, insurance, or stop-loss agreements

How Form 6198 Works

Form 6198 calculates:

1. Beginning at-risk amount
2. Increases (additional contributions, income)
3. Decreases (withdrawals, prior losses)
4. Current year loss allowed
5. Loss disallowed and carried forward

Key Concept:

• You can deduct losses only up to your at-risk amount
• Any excess loss is carried forward until you increase your at-risk investment or dispose of the activity

How to Enter Form 6198 in TaxSlayer

TaxSlayer will typically generate Form 6198 automatically when needed based on your entries.

Steps:

1. Go to Federal Section
2. Select Income
3. Choose:
   • Schedule K-1 Form 1065/1120S (Partnership/S Corp) OR
   • Profit or Loss from Rentals and Royalties (Schedule E) OR
   • Profit or Loss from Business (Schedule C)
4. Uncheck the "All Investment is At-Risk" box
5. Enter the activity details, including:
   • Current year profit or loss
   • Adjusted basis
   • Increase to basis for the tax year
   • Decrease to basis for the tax year

Carryforward of Disallowed Losses

If your losses exceed your at-risk amount:

• The unused portion becomes a suspended loss
• It carries forward to future years
• It can be used when:
  • Your at-risk amount increases, or
  • You dispose of the activity.

Interaction with Other Limitations

Form 6198 is just one of several rules that may limit losses:

1. At-Risk Rules (Form 6198) → Applied first
2. Passive Activity Loss Rules (Form 8582) → Applied second
3. Excess Business Loss Limits → Applied last

Even if a loss passes the at-risk rules, it may still be limited by passive activity rules.

Common Mistakes to Avoid

• ❌ Not identifying whether loans are recourse or nonrecourse
• ❌ Forgetting to include prior-year suspended losses
• ❌ Assuming all losses are deductible
• ❌ Entering incorrect investment basis vs. at-risk amounts

Example

You invest $10,000 in a partnership and are personally liable for a $5,000 loan:

• Total at-risk amount = $15,000
• Partnership reports a $20,000 loss

Result:

• Allowed loss: $15,000
• Disallowed loss: $5,000 (carried forward)