Form 6198, titled "At-Risk Limitations," is used to calculate the deductible loss from an at-risk activity for the current tax year, in accordance with Internal Revenue Code section 465. The form helps taxpayers determine their profit or loss from an at-risk activity (Part I), compute the amount at risk (Part II or Part III), and ultimately determine the deductible loss (Part IV). The at-risk rules limit the amount of loss a taxpayer can deduct to the amount they have at risk in the activity—meaning the amount they could personally lose if the activity fails.
Who Must File Form 6198?
- Individuals (including those filing Schedules C, E, or F with Form 1040 or 1040-SR)
- Estates and trusts
- Certain closely held C corporations as defined in section 465(a)(1)(B), as modified by section 465(a)(3)
You must file Form 6198 if you, a partnership in which you were a partner, or an S corporation in which you were a shareholder had amounts not at risk invested in an at-risk activity that incurred a loss during the tax year. Additionally, if you are engaged in an activity listed under item (6) in the At-Risk Activities section and have borrowed amounts described under Amounts Not at Risk, you must file this form.
At-Risk Activities
The at-risk rules apply to activities carried on as a trade or business or for the production of income. These include:
- Holding, producing, or distributing motion picture films or videotapes
- Farming (as defined in section 464(e))
- Leasing section 1245 property (as defined in section 1245(a)(3))
- Exploring for or exploiting oil and gas resources
- Exploring for or exploiting geothermal deposits (as defined in section 613(e)(2))
- Any other activity not included in (1) through (5) above
Certain equipment leasing activities by closely held C corporations are exempt from the at-risk rules under sections 465(c)(4), (5), and (6).
Exceptions to At-Risk Rules
- Holding real property placed in service before 1987
- Holding an interest acquired before 1987 in a partnership, S corporation, or other pass-through entity already engaged in holding real property before 1987
- A special exception applies to qualifying businesses of qualified C corporations (see Pub. 925 for details)
Note: The exception does not apply to holding mineral property.
Form Sections Overview
- Part I: Current Year Profit (Loss) – Reports ordinary income or loss from the at-risk activity without regard to at-risk limitations. Includes prior year nondeductible amounts. For taxpayers other than partners or S corporation shareholders, line 1 requires entering ordinary income or loss from the activity.
- Part II: Simplified Computation of Amount at Risk – For taxpayers who do not need detailed calculations. Line 8 requires adding lines 6 and 7.
- Part III: Detailed Computation of Amount at Risk – For more complex situations. Line 15 requires entering the amount at risk from the prior year’s Form 6198 (line 19b) if applicable. Lines 11–14 are skipped if Part III was completed for the prior year or if the activity began on or after certain effective dates.
- Part IV: Deductible Loss – Determines the deductible loss for the current year. Line 20 requires entering the larger of line 10b or line 19b.
Special Considerations for Closely Held Corporations
Closely held corporations must apply the interest expense deduction limitation under section 163(j) before applying the at-risk limitations.
Additional Guidance
For more detailed information on passive activity and at-risk rules, refer to IRS Publication 925. The form instructions also direct taxpayers to include investment interest expense on line 4 if applicable, and to complete Form 4952 if investment interest expense is involved.
Source:
Form 6198 Instructions (PDF)
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. Tax laws and regulations may change, and professional advice from a CPA or tax attorney is recommended for complex situations.