The at-risk rules place a limit on the dollar amount of any loss that a taxpayer can deduct from their business activities. This amount is generally based on the actual amount of money that the taxpayer stands to lose. Typically a loss that can be deducted by the taxpayer is limited to the actual investment that the taxpayer has made in a business plus any amounts that the taxpayer is personally liable.
When the taxpayer is not at risk of actually losing their investment, such as in the situation when loans are used to finance the business activity and the taxpayer is not personally responsible for the loan, any resulting loss from that activity would be limited to the amount that the taxpayer actually would lose. This concept is call the "At-Risk Limitation", and the allowed amount of any loss is reported on Form 6198 filed with the tax return.
Generally, any loss from an activity that is subject to the at-risk rules is allowed only to the extent of the total amount the taxpayer has at risk in the activity at the end of the tax year. A taxpayer is considered at-risk in an activity to the extent of cash plus the adjusted basis of other property the taxpayer has contributed to the activity along with certain amounts borrowed for use in the activity that the taxpayer is personally liable.
Form 6198, At-Risk Limitations is used to determine the profit (loss) from an at-risk activity for the current year, the amount at risk for the current year, and the deductible loss for the current year. Form 6198 should be filed when a taxpayer has a loss in a business activity reported on a Schedule C, E, or F and some or all of their investment is not at risk.
In TaxSlayer Pro, Form 6198 is only generated when the taxpayer is reporting a loss on Schedule C, E, or F and has indicated that not all of their investment in the business is at risk. If the taxpayer's business doesn't generate a loss, or if all of their investment is at risk, the form is unnecessary and unavailable.
Here are specific form instructions in TaxSlayer Pro.
Schedule C
In TaxSlayer Pro, to enter the At-Risk Limitation coming from a Schedule C, from the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Business Income/Loss - Select the Schedule C or create a new one if needed.
- Answer Schedule C Questions
- Is All of Your Investment in This Bus at Risk? - Select NO.
When you exit the Schedule C Edit Menu, the Form 6198 - At-Risk Limitations Menu will appear if the Schedule C contains a net loss. Enter in the required information as needed.
Schedule E rental property
In TaxSlayer Pro, to enter At-Risk Limitation coming from a rental property being reported on a Schedule E, from the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- Rents and Royalties - Select the property or enter a new property if needed.
- Supplemental Income Questions
- Is All of Your Investment in this Business At Risk? - Select NO.
When you exit the Rents & Royalties Edit Menu, the Form 6198 - At-Risk Limitations Menu will appear if the rental property contains a net loss. Enter in the required information as needed. The at-risk limitations for rental property losses are considered before the Passive Activity Limitations on Form 8582.
Schedule F
In TaxSlayer Pro, to enter At-Risk Limitation coming from farm activity being reported on Schedule F, from the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Farm Income (Sch F) - Select the Schedule F or create a new one if needed.
- Answer Schedule F Questions
- Is All of Your Investment in this Business At Risk? - Change to NO
When you exit the Schedule F Edit Menu, the Form 6198 - At-Risk Limitations Menu will appear if the farm has a loss. Enter in the required information as needed.
Schedule K-1
In TaxSlayer Pro, to enter At-Risk Limitation coming from a pass-through entity (partnership or S-corporation) being reported on a Schedule K-1, from the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- K-1 Input - Select the K-1 or enter a new one if needed.
- Is All Investment At-Risk? - Select NO.
When you exit the K-1 Entry Menu, the Form 6198 - At-Risk Limitations Menu will appear if the entity has a loss. Enter the required information as needed.
Note: This is a brief guide on at-risk limitations and producing Form 6198 in the TaxSlayer Pro program. This is not intended as tax advice.
Additional Information: