Key Takeaways

  • Form 6198 explained: It is used to calculate how much of your loss from an at-risk activity you can deduct in a given tax year.
  • At-risk limitations: Loss deductions are limited to the actual amount you have at risk, including cash contributions and certain borrowed amounts.
  • Form structure: The form has multiple parts for determining losses, adjusting at-risk amounts, and tracking carryover losses.
  • Common mistakes: Errors often occur when misidentifying what qualifies as "at-risk," incorrectly carrying losses, or overlooking recordkeeping.
  • Who must file: Any taxpayer with at-risk activities—such as partnerships, S corps, farms, or rental properties—may need to file.
  • Carryover losses: Disallowed losses can be carried forward to future years until you increase your at-risk basis.
  • Professional help: Due to its complexity, many business owners and investors consult tax professionals when completing this form.

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 (or loss) from an at-risk activity for the present year.  At-risk guidelines set limits on 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 activity 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.

When Form 6198 Applies

Form 6198 applies to taxpayers who are engaged in activities where they could lose only the money or property they contributed or borrowed for the activity. These include partnerships, S corporations, farming activities, real estate rentals, and certain equipment leasing businesses. If you have multiple at-risk activities, you must complete a separate Form 6198 for each one. Failing to file when required can delay your return processing or trigger IRS notices.

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 for is the only type that is taken into account as at-risk, meaning it’s tax deductible.

Common Errors and Challenges

Many taxpayers struggle with Form 6198 because of its technical definitions and calculations. Common mistakes include:

  • Misidentifying at-risk amounts: Not all borrowed funds qualify, especially if you are not personally liable for repayment.
  • Carrying losses incorrectly: Losses disallowed under at-risk rules must be tracked and carried forward, not simply deducted later without adjustment.
  • Overlooking changes in basis: Events like loan forgiveness, new contributions, or property transfers affect the at-risk calculation.
  • Incomplete records: Because Form 6198 requires detailed year-to-year tracking, missing prior-year worksheets often leads to errors.

Keeping clear records and understanding the IRS definition of “at-risk” are essential to avoid costly mistakes.

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 business.
  • 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 activities 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.

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.

Step-by-Step Instructions for Completing the Form

Form 6198 is divided into sections that work together to calculate your deductible loss:

  1. Part I – Current Year Profit or Loss: Report the income or loss from the activity.
  2. Part II – At-Risk Investment: Show the money and property you contributed, plus qualifying borrowed amounts.
  3. Part III – Loss Limits: Calculate allowable losses for the year based on your at-risk amount.
  4. Part IV – Deduction Summary: Summarize deductible losses and any carryover of disallowed losses.

If your loss is limited, you must attach a statement showing how the limitation was calculated. The IRS expects accurate carryover tracking, so maintaining worksheets year after year is critical.

Carrying Forward Disallowed Losses

If your losses exceed your at-risk amount, the excess is suspended and carried forward. These losses can only be used in a future year when your at-risk basis increases. For example, if you contribute additional cash or become personally liable on a loan, the suspended losses may then become deductible. This prevents taxpayers from deducting losses beyond their financial stake but ensures that genuine investments are recognized over time.

Why Professional Guidance Matters

Even experienced taxpayers and preparers find Form 6198 challenging. Its calculations tie into other forms, including Schedule E, Schedule F, and K-1s from partnerships or S corporations. Missteps can trigger IRS scrutiny, adjustments, or loss of deductions. Consulting a tax professional can save time, reduce errors, and ensure compliance.

Frequently Asked Questions

  1. Who needs to file Form 6198?
    Any taxpayer with income or losses from an activity subject to at-risk rules, such as partnerships, S corps, rental real estate, or farming.
  2. What counts as “at-risk” money?
    Cash, property contributions, and certain borrowed funds where you are personally liable for repayment.
  3. Can I deduct all my business losses?
    No. Losses are limited to the amount you have at risk in the activity. Excess losses are suspended until your at-risk basis increases.
  4. What happens to disallowed losses?
    They are carried forward to future years and may become deductible when your at-risk basis grows.
  5. Why is Form 6198 considered complicated?
    It requires precise tracking of contributions, loans, income, and losses year after year, and ties into multiple IRS forms.

If you need help completing Form 6198, you can post your job on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.