IRS Instruction 6198 – If your business, rental property, farming operation, or other income-producing activity generates a loss, you may not deduct the full amount on your tax return. The IRS at-risk rules under Section 465 limit deductions to the amount you have “at risk” in the activity. IRS Instruction 6198 explains how to calculate these limitations using Form 6198, At-Risk Limitations.
This comprehensive guide, based on the latest official IRS resources (Instructions for Form 6198, Rev. November 2025), breaks down the form, who must file it, key rules, and step-by-step completion instructions. Understanding these rules helps you avoid disallowed deductions, IRS audits, and unexpected tax bills.
What Is Form 6198 and Why Does It Matter?
Form 6198 calculates:
- Your current-year profit (or loss) from an at-risk activity (Part I).
- The amount you have at risk in the activity (Part II or Part III).
- The deductible loss for the current year (Part IV).
The at-risk rules prevent taxpayers from deducting losses beyond their actual economic investment. You cannot claim losses funded by nonrecourse loans or arrangements that protect you from loss. Any disallowed loss carries forward to future years when your at-risk amount increases.
Note: At-risk rules apply separately from (and before) passive activity loss rules (Form 8582) and basis limitations. Always consult IRS Publication 925, Passive Activity and At-Risk Rules, for full details.
Example of IRS Form 6198 (At-Risk Limitations). Always use the latest revision from IRS.gov.
Who Must File Form 6198?
File Form 6198 if you (or a partnership/S corporation in which you hold an interest) have a loss in an at-risk activity and some or all of your investment is not at risk. This applies to:
- Individuals filing Schedules C, E, or F (Form 1040).
- Estates and trusts.
- Certain closely held C corporations.
Specific triggers:
- You are involved in activities like holding films/videotapes, farming, leasing Section 1245 property, oil/gas or geothermal exploration, or any other trade or business/for-profit activity.
- You have nonrecourse financing, guarantees, stop-loss agreements, or borrowings from related parties that reduce your at-risk amount.
Exceptions: You generally do not file if the only non-at-risk amounts are certain pre-2004 borrowings or if the activity is real property placed in service before 1987 (with limitations). Partnerships and S corporations often provide at-risk information on Schedule K-1.
Understanding At-Risk Rules: What Counts as “At Risk”?
You are considered at risk for:
- Cash and the adjusted basis of property you contribute to the activity.
- Amounts borrowed for use in the activity for which you are personally liable (recourse debt).
- Your share of qualified nonrecourse financing (mainly for holding real property, secured by the property, from qualified lenders like banks, with specific conditions).
- Certain income, gains, and excess percentage depletion.
Amounts NOT at risk include:
- Nonrecourse loans (unless qualified for real property).
- Loans protected against loss by guarantees, stop-loss agreements, or similar arrangements.
- Borrowings from persons with an interest in the activity (other than as a creditor) or related parties.
- Cash or property contributed that was financed by non-at-risk amounts.
Qualified nonrecourse financing is a key exception for real estate activities. It must be nonrecourse, secured by real property used in the activity, and provided by a qualified person (e.g., a bank) or government entity. Rules have specific effective dates and qualifications—see the instructions for details.
Aggregation rules: Treat certain activities as one (e.g., all Section 1245 leasing by a closely held corporation) or separately (e.g., each film or farm) depending on the type.
Step-by-Step: How to Fill Out Form 6198?
Prepare: Gather your activity’s income, deductions, gains/losses on disposition, prior-year disallowed losses, and financing details. Describe the activity at the top (e.g., “Schedule C farming operation” or include partnership/S corp name and EIN).
Part I: Current Year Profit (Loss) From the Activity
Combine all income, gains, deductions, and losses without at-risk or passive limits (but include prior-year nondeductible amounts due to at-risk rules).
- Line 1: Ordinary income/loss (e.g., Schedule C, K-1 box 1).
- Lines 2a–2c: Gains/losses from asset dispositions (Schedule D, Form 4797, etc.).
- Line 3: Other income/gains from K-1s not reported above.
- Line 4: Other deductions/losses (including investment interest from Form 4952).
- Line 5: Total profit or loss.
If Line 5 shows a profit, report all items normally (attach Form 6198). Check for possible recapture if at-risk amount went negative. If a loss, proceed to Parts II/III to determine how much is deductible.
Part II: Simplified Computation of Amount at Risk
Use this if you know your adjusted basis and the activity is straightforward.
- Line 6: Adjusted basis at the beginning of the year (do not enter less than zero).
- Line 7: Increases (contributions, recourse/qualified loans, income, etc.).
- Line 9: Decreases (distributions, non-at-risk borrowings, prior losses, etc.).
- Line 10: Amount at risk.
Part III: Detailed Computation of Amount at Risk
Use for complex situations, multiple years, or when Part II may understate your at-risk amount. This includes worksheets for investment at the effective date, prior losses, and detailed increases/decreases since the effective date of the rules for your activity type.
Key lines:
- Line 15: Amount at risk at the effective date or prior year end.
- Line 16: Increases since then (use worksheet for excess percentage depletion).
- Line 18: Decreases since then.
- Line 19b: Current amount at risk.
Part IV: Deductible Loss
- Compare the loss on Line 5 to your at-risk amount (Line 10b or 19b).
- Line 21: Deductible loss (limited to at-risk amount).
- Prorate the allowable loss among individual deduction items if needed.
- Carry forward any disallowed loss to next year.
Example (simplified from instructions): You have a $4,600 Schedule C loss and $3,100 capital gain from the activity. Line 5 loss = $1,500. If your at-risk amount is $3,700, you can deduct the full $1,500 loss plus recharacterize part of the gain/loss allocation accordingly.
Form 6198 focuses on Parts I–IV to determine your allowable deduction.
Common Mistakes and Pro Tips
- Forgetting prior-year disallowed losses → Include them in current-year calculations.
- Misclassifying debt → Nonrecourse vs. recourse vs. qualified nonrecourse requires careful review.
- Ignoring aggregation/separation rules → This can dramatically affect your at-risk amount.
- Not coordinating with basis and passive rules → At-risk limits apply first in many cases.
- Track your at-risk amount annually—software like TurboTax or professional tax software often automates much of this, but verify inputs.
Pro tip: If your at-risk amount drops to zero or negative, watch for recapture of prior losses as income.
Recent Updates and Resources (2025 Instructions)
The November 2025 revision of Form 6198 and its instructions reflects current law with no major substantive changes noted in recent developments, but always confirm effective dates for qualified nonrecourse financing and activity-specific rules. Forms are revised periodically—download the latest from IRS.gov.
Key Resources:
- Instructions for Form 6198 (PDF)
- Form 6198 itself
- Publication 925: Passive Activity and At-Risk Rules
- IRS.gov/Form6198 for updates
Final Thoughts
IRS Instruction 6198 ensures you only deduct losses you are economically exposed to lose. While the form looks simple (one page), the calculations—especially Part III—can be complex for multi-year activities or those with intricate financing. Small business owners, real estate investors, farmers, and anyone with leveraged activities should pay close attention.
For personalized advice, consult a qualified tax professional or CPA, as individual circumstances vary. This guide is for informational purposes and based on official IRS publications as of early 2026.
Need help with your specific situation? Review your Schedule K-1s, loan documents, and prior returns, then complete Form 6198 alongside your tax software or preparer.
Keywords: IRS Form 6198, at-risk limitations, Instructions for Form 6198, Section 465 at-risk rules, deductible business losses, tax loss limitations 2025.
Stay compliant and maximize your legitimate deductions by understanding these important IRS rules.