Form 6198: At-Risk Limitations Explained

Taxes aren’t always just about reporting what you earned and paying what you owe. Sometimes, it’s about figuring out how much of your investment or loss you’re actually allowed to deduct. That’s where Form 6198 comes in. 

If you’ve got business or investment losses and you’re involved in certain types of activities, you might not be able to deduct everything in one go. Form 6198 helps figure out what you’re allowed to claim based on your actual financial risk in the venture.

If this sounds a little unfamiliar, don’t worry. We’re going to walk through everything you need to know about Form 6198, from when you have to use it to how it affects your tax return.

What Is Form 6198, and Why Does It Matter?

Form 6198 is used to calculate and apply the at-risk rules under section 465 of the Internal Revenue Code. That might sound intimidating, but the basic idea is pretty straightforward. The IRS wants to make sure you’re not deducting more in losses than the amount you actually had at risk in a business or investment activity. In other words, you can’t write off losses that exceed what you actually stood to lose financially.

Let’s say you’re involved in a business that reports a loss for the year. You can’t necessarily claim the full loss on your taxes unless you had enough of your own money (or certain types of debt) at risk in the business. Form 6198 is how you show the IRS what your limit is and how much of the loss you’re actually entitled to deduct this year.

Who Needs to File Form 6198?

You’ll generally need to file Form 6198 if you’re involved in a business or investment where losses are reported and you’re not at risk for the entire amount of that loss. This form usually applies to activities that are structured as partnerships, S corporations, or sole proprietorships where the taxpayer doesn’t have full liability or hasn’t invested their own funds.

The form is also required if you’re involved in passive activities or businesses where your loss might be financed by loans you’re not personally liable for—like nonrecourse loans, where the lender can only go after the collateral if things go south.

The IRS is particularly strict about applying the at-risk rules to things like real estate ventures, oil and gas investments, farming businesses, and other industries that often involve a mix of personal investment and borrowed funds.

How the At-Risk Rules Work

To understand how Form 6198 works, you need to know what counts as “at risk.” This usually includes:

• Money you personally invested in the activity
• Property you pledged for the business (and could lose if the activity fails)
• Loans where you are personally liable for repayment

It does not include funds protected by guarantees, nonrecourse loans where you’re not personally on the hook, or borrowed money where someone else carries the ultimate financial risk.

When your activity has a loss, Form 6198 is used to calculate your at-risk basis and then determine how much of the loss you can actually deduct. If you can’t deduct it all, the rest is carried forward to future years, where it can be used if your at-risk amount increases.

How Form 6198 Fits Into Your Tax Return

Form 6198 doesn’t stand alone—it’s usually attached to your main tax return and goes along with other business-related forms like Schedule C, Schedule E, or K-1s from partnerships or S corps. You won’t use this form if you’re only reporting regular W-2 wages or itemized deductions. It’s specifically for business or investment activities with potential losses and risk limits.

When you fill out the form, you’ll report your total losses, your at-risk investment, and then figure out what portion of the loss you’re allowed to deduct. It’s all about matching the loss to the amount you had on the line.

What Happens to Disallowed Losses?

If your loss exceeds your at-risk amount, don’t worry—the IRS doesn’t just let you lose that loss forever. Instead, the rules allow you to carry forward the disallowed losses to future years, meaning that you can potentially deduct them when your at-risk amount increases.

The at-risk amount refers to the amount of money you have invested in a business or property, or the amount you have personally guaranteed as debt related to that investment. Essentially, it’s the financial amount that you have “at risk” in the business activity or property, and you can only claim losses up to that amount.

If your share of the losses exceeds your at-risk amount in a given year, the loss will be disallowed for that year. However, that doesn’t mean the loss is permanently lost. The IRS allows you to carry forward the disallowed portion of the loss to future tax years, where you may be able to use it if your at-risk amount increases.

Example of Carrying Forward Disallowed Losses

Let’s break it down with an example to see how this works:

Suppose you have a business investment where, in 2025, your at-risk amount is $3,000. However, your share of the loss for that year is $5,000. Under the at-risk rules, you are only allowed to deduct up to the amount you’re at risk for. Since your at-risk amount is only $3,000, you can only deduct $3,000 of the $5,000 loss.

So, in 2025, you can claim $3,000 of the loss on your tax return, but the remaining $2,000 of the loss is disallowed. However, here’s where the carryforward provision comes in: that $2,000 disallowed loss doesn’t just disappear. The IRS allows you to carry it forward to future years.

In this case, if your at-risk amount increases in 2026 (for example, if you make additional investments or the value of the business rises), you could potentially claim the remaining $2,000 loss in 2026. The carryforward allows you to “catch up” on the losses you couldn’t deduct in prior years due to the limitation on your at-risk amount.

Important Considerations about Form 6198

1. Future Increases in At-Risk Amount: For the carryforward to be effective, you must have an increase in your at-risk amount in the future. If your at-risk amount remains the same or decreases, you won’t be able to use the carried-forward losses.
2. Time Limits: There are no specific expiration dates for how long you can carry forward the disallowed losses, but they do remain in effect until you can either deduct them because your at-risk amount has increased or until the investment is disposed of (such as through the sale or liquidation of the business). Keep in mind that the at-risk amount can be impacted by various factors like additional investments, debt repayment, or distributions, so it’s important to track any changes carefully.
3. Record Keeping: To claim carried-forward losses, it’s critical to maintain thorough records of your at-risk amounts and how much of your losses were disallowed in previous years. This information is necessary when you file your taxes in the future to ensure you accurately claim any losses that were carried forward.

Special Circumstances

• Partnerships or LLCs: If you are involved in a partnership or LLC, your at-risk amount may be influenced by factors such as guarantees or your share of partnership liabilities. Make sure to calculate your at-risk amount in accordance with partnership rules, which may differ from individual investments.
• S Corporations: If your business is structured as an S corporation, you may be able to increase your at-risk amount by making additional contributions to the corporation or by taking on personal liability for certain debts.

Common Mistakes to Avoid

Form 6198 isn’t one of the more commonly used IRS forms, so it’s easy to overlook or misunderstand. A few common mistakes include:

• Deducting the full loss without applying the at-risk limits
• Assuming all loans count as at-risk contributions (many don’t)
• Forgetting to carry forward unused losses
• Not filing the form when required (which can delay your refund or trigger IRS questions)

If you’re using tax software, most programs will prompt you to complete this form if it applies. If you’re filing manually or through a preparer, it’s worth checking if any of your business or investment activities need this extra step.

The Final Word on Form 6198

Even though it’s not the most well-known form out there, Form 6198 plays an important role if you’re involved in certain types of businesses or investments. It helps the IRS make sure people aren’t deducting more than they’re financially exposed to, and it gives you a clear way to report losses the right way.

If you think Form 6198 might apply to your situation, don’t ignore it. Take some time to understand how your investment is structured and what you’re truly at risk for. When in doubt, reach out to a tax pro who knows their way around at-risk rules. It’s better to file it right the first time than to deal with IRS corrections later.

Form 6198: FAQ

1. What exactly does Form 6198 do?

Form 6198 helps the IRS determine how much of your loss from a business or investment you’re actually allowed to deduct for the year. The key concept here is “at risk,” which refers to the amount of your own money—or certain types of liability—you’ve put into the activity.

The IRS doesn’t want taxpayers deducting losses that they weren’t truly financially exposed to, so Form 6198 makes sure that only the portion of the loss you were genuinely at risk for is deducted on your return.

2. How do I know if I need to use Form 6198?

You’ll usually need Form 6198 if you’re claiming a loss from a business or investment and you weren’t fully at risk for the entire loss amount. That can happen when you’re in a partnership, an S corporation, or you have a side business or rental property where your financial exposure is limited.

If any of your business funding involves nonrecourse loans or similar arrangements where you’re not personally responsible for the debt, the IRS might expect you to use this form. Most tax software or a good tax preparer will flag this for you if it applies.

3. What does “at risk” mean in this context?

Being at risk means you stand to lose your own money or assets if the business or investment doesn’t do well. That includes cash you put in, property you contributed, or loans you’re personally liable to repay.

It doesn’t include borrowed money where someone else bears the risk or debt where your loss is limited to collateral and not your personal finances. The IRS wants to know what you had skin in the game for, and that’s the number used to limit your deductible loss.

4. What happens if my loss is more than my at-risk amount?

If your loss is bigger than what you had at risk, you don’t lose the excess forever. You just can’t deduct it in the current tax year. The amount that exceeds your at-risk limit is carried forward to future years.

You’ll get a chance to deduct it later on—either when your investment increases, you contribute more funds, or your level of personal liability changes. It’s kind of like putting those losses on pause until you’ve got more at risk to back them up.

5. Is Form 6198 only for big investments or business owners?

Not necessarily. While it’s more common for folks involved in partnerships, S corps, or real estate ventures, it can also apply to smaller side businesses or investments.

If you’re running a small operation and you borrowed funds where you’re not personally responsible for repayment, or you have investors backing you, Form 6198 might still be necessary. It’s not just for big companies or major real estate developers—it’s for anyone with limited financial exposure in a business or investment activity.

6. Can I skip this form if my tax software doesn’t ask for it?

Not a good idea. Most modern tax software does a solid job prompting you when Form 6198 is needed, especially if you’re entering information from a K-1 or claiming business losses. But if you’re entering things manually, or your situation is a bit outside the usual boxes, it’s possible the software could miss it.

If you’re unsure whether you’re at risk for your entire loss, it’s worth doing a little extra digging or talking to a tax pro. Filing without it when it’s required could lead to IRS letters and amended returns down the road, which no one wants to deal with.

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