IRS Form 6198 – At-Risk Limitations

IRS Form 6198 – In the world of tax deductions, especially for business owners and investors, understanding limitations on losses is crucial. IRS Form 6198, also known as At-Risk Limitations, plays a key role in determining how much of a loss from certain activities you can deduct on your tax return. This form ensures that you only claim deductions up to the amount you’ve actually invested or are financially responsible for—preventing over-deductions that could lead to tax issues. Whether you’re involved in real estate, farming, or other income-producing ventures, mastering Form 6198 can help you navigate IRS rules effectively.

In this comprehensive guide, we’ll break down what IRS Form 6198 is, who needs to file it, key definitions like “amount at risk,” and a step-by-step walkthrough on how to complete it. We’ll also cover common pitfalls and related resources. This article is based on the latest IRS guidelines as of the November 2025 revision, applicable for the 2025 tax year.

What Is IRS Form 6198 and Its Purpose?

IRS Form 6198 is a tax form used to calculate limitations on losses from “at-risk” activities under Section 465 of the Internal Revenue Code. The primary purpose is to limit the deductible loss to the amount you have at risk in the activity, protecting the IRS from allowing deductions beyond your actual economic investment.

Specifically, the form helps you figure out three main things:

  • Current year profit or loss from the activity, including prior-year nondeductible amounts.
  • Amount at risk for the current year.
  • Deductible loss for the year, after applying at-risk rules.

If your activity generates a loss, Form 6198 ensures you can’t deduct more than what you’re personally on the hook for. This is particularly relevant for passive activities or businesses where losses might exceed your invested capital. For example, if you’re a partner in a real estate venture and incur a loss, this form determines how much of that loss is allowable on your Form 1040.

At-risk rules apply to various activities, including farming, oil and gas exploration, motion picture production, and leasing personal property. However, holding real property (except minerals) placed in service before 1987 may be exempt.

Who Needs to File IRS Form 6198?

Not everyone with a business loss needs to file Form 6198. You must file if:

  • You’re an individual (filing Schedules C, E, or F on Form 1040 or 1040-SR), estate, trust, or certain closely held C corporation.
  • You have amounts not at risk in an at-risk activity that incurred a loss during the tax year.
  • This includes situations where you, a partnership you’re in, or an S corporation you’re a shareholder in had non-at-risk investments leading to losses.
  • You’re engaged in specific activities (like those listed above) and have borrowed certain amounts considered not at risk.

For instance, if you’re a sole proprietor reporting a loss on Schedule C and part of your investment is protected (e.g., through guarantees), you’ll likely need this form. Estates and trusts also file if they have at-risk activities with losses. If the loss is from a passive activity, you may need to coordinate with Form 8582 (Passive Activity Loss Limitations) after completing Form 6198.

If your activity shows a profit, you might still attach Form 6198 if your amount at risk is negative, as it could trigger recapture rules.

Key Concepts: What Does “At Risk” Mean?

The core of Form 6198 revolves around your “amount at risk,” which is the total economic exposure you have in the activity. You’re considered at risk for:

  • Cash and adjusted basis of property you contributed.
  • Amounts borrowed where you’re personally liable (recourse loans).
  • Qualified nonrecourse financing (e.g., real estate loans from unrelated lenders, secured by the property, and not convertible to equity).

Conversely, you’re not at risk for:

  • Nonrecourse loans (unless qualified).
  • Amounts protected by guarantees, stop-loss agreements, or insurance (beyond casualty/tort).
  • Borrowings from related parties or those with an interest in the activity (with exceptions for post-2004 real property loans).

Understanding these distinctions is vital because only at-risk amounts allow loss deductions. If your calculated amount at risk is zero or negative, you can’t deduct losses and may need to recapture prior deductions as income.

How to Fill Out IRS Form 6198: Step-by-Step Guide?

Form 6198 has four parts. Start by entering your name, identifying number, and a description of the activity (e.g., “Real Estate Rental” or the partnership/S corp details). If you have multiple activities, file a separate form for each unless aggregation rules apply (e.g., for actively managed trades or businesses).

Part I: Current Year Profit (Loss) From the Activity

This section computes your net profit or loss before at-risk limits.

  • Line 1: Enter ordinary income/loss from the activity (e.g., from Schedule E or K-1). Include prior-year nondeductible losses.
  • Line 2a–2c: Report gains/losses from asset sales on Schedule D, Form 4797, or other forms.
  • Line 3: Other income/gains (e.g., from K-1 not covered above).
  • Line 4: Other deductions/losses, including investment interest from Form 4952.
  • Line 5: Total (lines 1–4). If positive, report normally; if negative, proceed to Parts II/III.

If Line 5 is a loss exceeding income/gains, prorate deductions proportionally.

Part II: Simplified Computation of Amount at Risk

Use this for a quick calculation if you know your adjusted basis.

  • Line 6: Adjusted basis at the start of the year (not reduced by liabilities for sole proprietors).
  • Line 7: Increases (e.g., contributions, qualified loans).
  • Line 8: Sum of 6 and 7.
  • Line 9: Decreases (e.g., distributions, nonqualified loans).
  • Line 10a: Line 8 minus 9.
  • Line 10b: Enter positive amount or -0-; if negative, see recapture in Pub. 925.

If this yields a lower at-risk amount than expected, use Part III instead.

Part III: Detailed Computation of Amount at Risk

This is more precise, especially for ongoing activities.

  • Lines 11–14: Investment, increases, and decreases at the “effective date” (varies by activity type, e.g., post-1975 for most).
  • Line 15: Amount at risk at effective date or from prior year’s Line 19b.
  • Line 16: Increases since effective date (e.g., net income, contributions).
  • Line 17: Line 15 + 16.
  • Line 18: Decreases (e.g., losses, distributions).
  • Line 19a: Line 17 minus 18.
  • Line 19b: Positive amount or -0-.

Use worksheets in the instructions for complex calculations.

Part IV: Deductible Loss

  • Line 20: Higher of Line 10b or 19b.
  • Line 21: Smaller of the absolute value of Line 5 loss or Line 20. Report this on your return; carry over disallowed amounts.

Attach the form to your return and apply other limits (e.g., passive activity rules) as needed.

Common Mistakes When Filing Form 6198 and Tips to Avoid Them

  • Misclassifying Loans: Ensure nonrecourse loans qualify; otherwise, they reduce your at-risk amount.
  • Forgetting Prior Years: Always include nondeductible losses from previous years.
  • Aggregation Errors: Don’t combine activities unless rules allow—treat each film, farm, or lease separately.
  • Passive Activity Overlap: Complete Form 6198 before Form 8582.

Tips: Consult Pub. 925 for details, use tax software like TurboTax for automation, and consider a tax professional if dealing with complex partnerships. Double-check effective dates for your activity type.

  • Form 8582: For passive activity losses.
  • Form 4952: Investment interest expense.
  • Pub. 925: Passive Activity and At-Risk Rules (essential reading).
  • Schedule K-1: From partnerships/S corps.
  • Download Form 6198 PDF: IRS Official Site.

For the latest updates, visit IRS.gov or consult a tax advisor, as rules can change (e.g., qualified financing exceptions post-2004).

Final Thoughts on At-Risk Limitations

IRS Form 6198 ensures fair tax treatment by tying deductions to real financial risk. By accurately calculating your amount at risk, you can maximize allowable losses while staying compliant. If you’re facing a loss in an at-risk activity for 2025, start gathering your records now—filing correctly can save you from audits or penalties. Always refer to official IRS sources for personalized advice.