Form 6198: At Risk Limitations
Federal Form 6198, also known as the "At-Risk Limitations" form, plays a crucial role in reporting losses from certain business activities for tax purposes. This document helps the Internal Revenue Service (IRS) determine the allowable deduction for losses incurred in ventures where the taxpayer's financial risk is limited.
What are At-Risk Activities?
The at-risk rules apply to specific business ventures where the taxpayer's potential for loss is not directly proportional to their invested capital. This typically occurs when a significant portion of the funding comes from nonrecourse loans – loans that are not secured by the taxpayer's personal assets. Here are some of the most common at-risk activities:
- Holding, producing, or distributing motion picture films or videotapes
- Farming
- Leasing certain types of property (defined as Section 1245 property under tax code)
- Exploring for or exploiting geothermal deposits
- Any activity where the taxpayer guarantees a loan made to the activity (except for certain exceptions)
Note: It's important to note that this is not an exhaustive list. If you're unsure whether your business activity falls under the at-risk rules, consulting a tax professional is recommended.
Who Needs to File Form 6198?
You are required to file Form 6198 if you meet all the following conditions:
- You engaged in an at-risk activity during the tax year.
- The activity incurred a loss.
- You have any amount invested in the activity that is considered "not at risk" (explained further below).
What is Considered "At-Risk?"
The amount you have "at risk" in an activity represents your personal financial exposure. It includes:
- Cash contributions you made to the activity.
- The adjusted basis of any property you contributed to the activity (generally, the original cost minus depreciation).
- Any loans you secured for the activity, but only if the loans are recourse loans.
Do I need to file Form 6198 if my at-risk activity had a profit?
No, Form 6198 is only necessary if you need to report a loss from an at-risk activity and have "not at risk" amounts involved.
What happens if my loss from the at-risk activity exceeds my at-risk amount?
The at-risk rules limit your current year's deductible loss to the amount you have at risk in the activity. However, any disallowed loss can be carried forward to future tax years and potentially deducted when your at-risk amount increases.
How can I determine the amount I can deduct as a loss?
Form 6198 acts as a worksheet to calculate your allowable loss deduction. It considers your total loss, at-risk amount, and any carried-forward losses from previous years.
Can I use personal guarantees on loans as "at-risk" investment?
No. Personal guarantees on loans made to the activity are considered "amounts not at risk" and do not count towards your at-risk investment.