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Your Guide To IRS Form 6198: At-Risk Limitations

Your Guide To IRS Form 6198: At-Risk Limitations

The majority of investors expect to make a profit when they start a business. It is true that when a business's expenditures exceed profits and a loss occurs, a tax deduction may well be the only way to recover any losses incurred.

Taxpayers are usually allowed to deduct up to a certain amount from their income for business expenses. When some of your investment falls under the "at-risk" category, you can deduct the amount on IRS form 6198.

This blog post shall discuss and explain what is at risk limitations Form 6198 and how you can use it to your benefit.

What Are At Risk Limitations?

In business ventures, tax deductions can make a big difference in reducing your overall tax bill. A variety of items can be deducted from your taxes if they aid your business, such as insurance, repairs, and charitable donations. The amount of the taxpayer's adjusted basis of property contributed to the activity and the specific amounts borrowed by the taxpayer to use within the activity is considered by the IRS to determine the extent of a taxpayer's risk in the activity.

A business's investment, however, may not be fully deductible due to IRS at-risk restrictions. A taxpayer is not allowed to deduct any more than their actual stake in a business under the at-risk rules. A tax deduction is usually available only for money that you are personally liable for, which means that, as a result, the only money that is at risk is deducted for tax purposes.

IRS Form 6198 Explained

What is form 6198? Using Form 6198, you can figure out the maximum amount you can deduct after you have suffered a loss in your business in the tax year. Form 6198 consists of four sections and allows you to:

  • Estimate your current year's business losses

  • Make an assessment of the amount at risk in the business

  • Determine if you can apply previous years' at-risk deductions this year

  • Calculate your current tax-year deductions

The Form 6198 instructions will help you in filling out the 21 lines with all the necessary data.

Form 6198 should be filed separately for each activity related to your business. When the business is an S Corporation, then you are able to aggregate all of your investments on the same form as long as it is S Corporation.

Whenever you experience a loss in a revenue-producing activity that the IRS deems at risk, you must file Form 6198 with your tax return. At-risk limitations apply to most business activities.

Why The Need For At-Risk Rules?

At-risk limitations are now in place because investors in certain business activities, notably real estate, were more likely to profit from losses and tax deductions than from investment gains before the IRS implemented at-risk limitations.

By limiting the deductions investors could take when they faced a loss in a business, Congress aimed to reduce the number of bad business deals that investors benefit from and to encourage investors to invest in credible businesses.

What’s The Way Forward

Using mortgage financing and nonrecourse loans, you can invest as much or as little money as you wish in real estate investment.

A non-recourse loan is a loan secured by your home, so in the event you don't pay, the lender can foreclose on it, but it cannot pursue you for any unpaid losses. When you secure a nonrecourse debt with property, it still falls under at-risk limits even though you are not personally liable.

Whatever your investments are, we have you covered, whether they are stocks, bonds, ETFs, cryptocurrencies, rental property income, or other assets. At TFX, we make your taxes easier while increasing your knowledge and understanding of taxes.

Ines Zemelman, EA
Founder of TFX