Form 6198: At-Risk Rules for Business Losses
Form 6198 limits a business loss deduction to the amount you have at risk in the activity. If you aren't personally exposed to part of the loss, you may have to carry that portion forward instead of deducting it this year.
A loss on your Schedule K-1 or business records doesn't automatically become a deduction on your return. The financing behind the activity matters, and other tax rules may apply after the at-risk calculation.
Key Takeaways
- Form 6198 generally applies when you have a loss from a covered activity and aren't at risk for all your investment.
- Cash, the adjusted basis of contributed property, and certain debts can count toward your at-risk amount.
- Most nonrecourse debt doesn't count, although qualified nonrecourse financing for real estate can qualify.
- A loss limited by the at-risk rules generally carries forward to the same activity.
- Basis, passive activity, and excess business loss rules can also affect your deduction.
Who Must File Form 6198?
You generally file Form 6198 with your tax return if you have a loss from an activity covered by the at-risk rules and some of your investment isn't at risk.
The rules can apply to individuals, estates, trusts, and certain closely held C corporations. Partners and S corporation shareholders may need the form for losses passed through to them. A multi-member LLC owner may face the same rules when the LLC is taxed as a partnership.
The activities covered include most businesses conducted for profit. Special categories also include farming, leasing certain property, and oil and gas activities.
You may also need to file even without a current-year loss when an activity has certain borrowed amounts described as not at risk. The IRS instructions for Form 6198 explain the filing requirements for those situations.
Generally, you complete a separate form for each activity subject to the limitation. That distinction matters because the amount at risk in one activity usually doesn't support a loss from another.
How to Determine Your Amount at Risk
Your at-risk amount is the amount you could lose economically from the activity under the tax rules. It changes over time as you invest, earn income, take distributions, and deduct losses.
Cash and property investments
Cash you contribute to an activity generally increases your amount at risk. Property you contribute can count too, but the starting amount is generally its adjusted tax basis , not its current market value.
For example, equipment's adjusted basis generally reflects its original tax cost reduced by applicable depreciation. Its value on the used-equipment market doesn't by itself determine the amount at risk.
Taxable income from the activity can increase your amount, while distributions and deductible losses generally reduce it. Keep a running record rather than relying on the current balance in a business bank account.
Protection against loss
Amounts protected by certain guarantees, reimbursement arrangements, or other protections generally aren't at risk to the extent you're protected. The substance of an agreement matters: a contribution or debt may appear on the books, yet the owner may have little exposure if someone else must cover the loss.
Your at-risk amount can also differ from your tax basis. Basis is an earlier limitation for partnership and S corporation losses, but it answers a different question.
Which Business Debts Count as At Risk?
Borrowed money can increase your amount at risk when it's used in the activity and you meet the liability requirements. The loan balance alone doesn't answer whether it qualifies.
Personal liability and pledged property
An amount borrowed for the activity may count to the extent you're personally liable for repayment. A debt may also count to the extent you pledge property outside the activity as security, subject to the value of that property and other applicable limits.
A guarantee or loan agreement needs careful attention. The portion that counts depends on the actual repayment obligation, any protection against loss, and the other facts. A business liability appearing on a balance sheet doesn't automatically increase every owner's at-risk amount.
For partners, a share of liabilities can affect outside basis without necessarily producing the same increase in the at-risk calculation. The IRS partner's Schedule K-1 instructions describe liability information partners receive.
Nonrecourse loans and real estate
With a nonrecourse loan, the lender generally looks to the collateral rather than holding you personally liable. Nonrecourse debt generally doesn't count toward your amount at risk.
An exception applies to qualified nonrecourse financing connected with holding real property. It must meet the tax definition, including the requirement that it be secured by real property used in the activity. A nonrecourse loan for an ordinary operating business doesn't qualify merely because the business borrowed it.
How the Four Parts of Form 6198 Work
Form 6198 moves through the activity's loss, the investment exposed to loss, and the amount allowed for the year.
Part I: Calculate the activity's result
Part I brings together the income, gains, losses, and deductions attributable to the activity. It also accounts for applicable prior-year losses that were disallowed under the at-risk rules.
For a pass-through business, use the complete K-1 and supporting statements. Ordinary business income or loss is only one item. Separately stated items can also matter when calculating the activity's result.
Parts II and III: Calculate the amount at risk
The form provides two methods for calculating the amount at risk. Part II is a simplified calculation for taxpayers who meet its conditions. Part III provides a more detailed calculation when the simplified method isn't available or appropriate.
The calculation takes account of investments, qualifying debt, and relevant adjustments. Prior losses and distributions matter because they can reduce the amount available to support a new deduction.
Part IV: Determine the allowable loss
Part IV compares the activity loss with the amount at risk. The allowable amount moves forward to the return, subject to any other limitations. The balance is suspended under the at-risk rules.
The result on Form 6198 isn't necessarily the final deduction on Form 1040. A passive activity limitation may still apply.
A Simple Form 6198 Example
Consider a partner who contributes $20,000 cash to a business. The partnership also borrows $5,000 on a nonrecourse basis, and that debt doesn't qualify for the real estate exception.
Assume the partner's share of the debt gives them enough partnership basis to pass the basis limitation. The partner receives a $25,000 loss allocation, has no other relevant adjustments, and meets any other requirements for deducting the loss.
| Calculation | Amount |
|---|---|
| Cash at risk | $20,000 |
| Nonrecourse debt counted as at risk | $0 |
| Total at risk before the loss | $20,000 |
| Loss allocated to the partner | $25,000 |
| Loss allowed under the at-risk rules | $20,000 |
| Loss suspended under the at-risk rules | $5,000 |
The partner can deduct $20,000 if no later limitation applies. The remaining $5,000 carries forward under the at-risk rules.
If the partner contributes another $5,000 in a later year, that contribution can increase the amount at risk. Assuming no other relevant changes or limitations, the suspended $5,000 could then become deductible.
What Happens to a Suspended Loss?
A loss disallowed by the at-risk rules generally carries forward to the next tax year as a deduction from the same activity . It doesn't disappear, but it isn't automatically deductible in the next year.
An additional cash contribution or qualifying increase in debt can increase the amount at risk. Activity income can also affect the calculation. Distributions, deductible losses, or changes in liability may reduce the amount available.
Keep a separate record for each activity that shows the original tax year, the suspended amount, and the reason for the suspension. Also record when any part becomes deductible. The IRS explains the carryforward rules in Publication 925.
A decrease in your amount at risk can have another consequence. If it falls below zero, the at-risk recapture rules may require you to include an amount in income. Distributions and debt changes deserve attention even in a year without a new loss.
How At-Risk Rules Fit With Other Loss Limits
The at-risk test is one step in a sequence. Passing it doesn't mean the full loss reaches your return.
Basis comes first
Partners and S corporation shareholders generally apply their applicable basis limitations before the at-risk rules. A loss suspended for lack of basis must clear that limitation before it can move to the at-risk calculation.
For a partnership, outside basis can change with contributions, income, distributions, losses, and the partner's share of liabilities. Our guide to tracking LLC members' tax basis explains those adjustments.
Passive activity and excess business loss rules follow
After the at-risk test, the passive activity rules can restrict losses from activities in which you don't materially participate. Rental activities also have special passive activity rules. Individuals generally use Form 8582 when that form is required.
An otherwise allowable business loss may then be subject to the excess business loss limitation for noncorporate taxpayers, reported on Form 461 when applicable. The Schedule E instructions describe how these limitations fit together.
A loss can be suspended under more than one rule over its life. Track the reason at each stage so you don't release it solely because a different limitation has changed.
Records That Make the Calculation Easier
Keep prior Forms 6198 and their carryover schedules with your tax records. For each activity, retain contribution records, loan agreements, guarantees, distribution details, and documents showing changes in debt.
Owners of pass-through businesses should also retain the full K-1 package. Income can affect your investment even when the business keeps its cash, while a distribution can reduce basis and the amount at risk. Our guide to K-1 losses and basis covers the owner-level records.
Form 6198 FAQ
Does a K-1 loss guarantee a deduction?
No. The K-1 reports your share of the business's items. Your own basis, amount at risk, and passive activity status help determine what you can deduct.
Can a suspended loss offset income from another business?
An at-risk suspended loss carries forward as a deduction from the same activity. It doesn't become a general deduction available against any business you own.
Does paying off a business loan increase my amount at risk?
Not automatically. The result depends on who pays the loan, whether the debt counted as at risk, and how the payment affects your investment and liabilities.
Keep Your Loss Records Connected
Form 6198 ties your deduction to the amount you have exposed to loss. A contribution, debt change, or distribution can change that calculation, even when the business's books look straightforward.
Keep your at-risk carryover separate from basis and passive loss records. That makes it easier to recognize when a previously suspended loss can move through the remaining limitations.
