Form 6198: Everything You Need to Know

Tax Form 6198 helps you determine the amount you can deduct when some of your funding is considered "at-risk.” The Internal Revenue Service (IRS) lets taxpayers deduct cash spent on company expenses up to a specified amount. Form 6198 is used to determine the profit (loss) from an at-risk activity for the present year.  At-risk guidelines set limits for the amount taxpayers can deduct as a loss. Usually, losses from activities that are subject to the at-risk guidelines are allowed solely to the extent of the overall amount the taxpayer has at risk within the exercise at the tax year’s end.

A taxpayer is considered at risk in an activity to the extent of the adjusted basis of property the taxpayer contributed to the activity and specific amounts borrowed to be used within the activity. Taxpayers must file Form 6198 if they have any amount invested in an at-risk activity, even if they weren’t at risk.

At-Risk Limitations Explained

Tax deductions lower your tax bill and can also lower the losses of a company. Items like property repairs, charitable donations, and insurance coverage can typically be tax deductible in the event that they benefitted your small business. Nonetheless, not the entire amount you spend on a business is deductible, which is because of IRS at-risk limitations. The at-risk guidelines prevent taxpayers from deducting more than their exact stake in a business. Money you are personally responsible is the only type that is taken into account as at-risk, meaning it’s tax deductible.

Breaking Down Form 6198

Form 6198 helps you find out the highest amount you'll be able to deduct after facing a company loss within the tax year. The form comes as a four-section worksheet that helps you perform the following:

  • Determine losses for the present year.
  • Estimate the amount at risk within the enterprise.
  • Calculate at-risk deductions from earlier years to apply to the present year.
  • Determine the overall allowable deduction you'll be able to take for the present tax year.

When filing your return, Form 6198 must be filed with it if you’ve experienced any losses in income-producing exercises considered to be “at-risk” by the IRS. At-risk limitations apply to many business activities.

Before at-risk limitations were applied by the IRS, traders in certain company actions stood to earn more from tax deductions and losses than from valuable properties and investments.

To encourage investments in legitimate ventures and to stop traders from benefitting from purposeful corrupt business actions, Congress restricted the deductions traders might take when going through business losses.

How Do I Submit Form 6198?

Perform the following actions according to your situation. On Schedule C, go to the Income/Deductions > Business worksheet and select Section 13 - At-Risk Limitations (6198).

  • For Rent/Royalty, go to the Income/Deductions > Partnership Passthrough worksheet and select section 16.
  • For Partnership Passthrough, go to the Income/Deductions > Partnership Passthrough worksheet and select Section 12.
  • For S Corporation Passthrough, go to the Income/Deductions > S Corporation Passthrough worksheet and select Section 12.
  • For Schedule F/Form 4835, go to the Income/Deductions > Farm / 4835 worksheet and select Section 10.

After selecting the appropriate section, enter data as needed:

  • Computation of Amount At-Risk
  • Increases to Amount At-Risk
  • Decreases to Amount At-Risk
  • Other Increases/Decreases

Finally, calculate the return.

A separate worksheet must be completed for each entity or activity subject to at-risk rules. Form 6198 Parts II and III are completed based on the information entered in Lines 1 through 24. If the losses from the entity or activity are limited by at-risk rules, a statement behind Form 6198 will detail the loss allowed and disallowed.

How Do I Generate Form 6198 Using Interview Forms in Individual Tax?

Go to Federal Interview Form N-2 - Form 6198 - General Info, Increases & Decreases to Amount At-Risk. In boxes 30 - 33 - Activity Information (MANDATORY), input the appropriate information as follows:

  • Box 30 – Enter Schedule C Entity Number to attach to the appropriate Schedule C.
  • Box 31 – Rent/Royalty Entity Number to attach to the appropriate Schedule E, page 1.
  • Box 32 – Passthrough Activity Number to attach to the appropriate ACTIVITY for Schedule E, page 2.
  • Box 33 – Schedule F/4835 Entity Number to attach to the appropriate Schedule F or Form 4835.

Calculate the return.

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