Form 6198 is the IRS form that applies the at-risk limitations under Internal Revenue Code §465 to a loss from a business or income-producing activity, and it decides how much of that loss you can actually deduct this year. The rule behind the form is simple: your deduction is capped at what you could genuinely lose — cash and property you’ve put in, plus debt you’re personally on the hook to repay. Anything above that ceiling is suspended and carried forward until your at-risk amount grows. You attach Form 6198 to your Form 1040 or Form 1041 every year you have amounts not at risk in a loss activity, and you file a separate form for each activity unless the IRS aggregation rules let you combine them.
Who Has to File Form 6198
You file Form 6198 if you had amounts not at risk in an activity that produced a loss for the year. That covers individuals reporting on Schedule C, E, or F; estates and trusts; and certain closely held C corporations. A closely held C corporation is subject to the at-risk rules if more than 50 percent of its outstanding stock is owned, directly or indirectly, by five or fewer individuals at any time during the last half of the tax year, and it is not a personal service corporation.
Partners and S corporation shareholders pull their starting numbers from Schedule K-1 (Form 1065 or Form 1120-S) and complete Form 6198 at the individual level. The activity is tested on your return, not the entity’s.
Activities the At-Risk Rules Cover
The rules originally targeted five industries: film and video production or distribution, farming, oil and gas exploration, geothermal exploration, and leasing of Section 1245 depreciable personal property. Congress later expanded coverage to virtually every trade or business activity and any activity engaged in for the production of income. If you run a business or invest in an income-producing venture, assume the rules apply. The original five categories still matter in one narrow spot: certain related-party lending restrictions work differently for the enumerated activities than for the broader catch-all.
How Your At-Risk Amount Is Calculated
Your at-risk amount is a running balance. It grows when you put money in or the activity earns income, and shrinks when you pull money out or claim losses.
The following increase your at-risk amount:
- Cash you contribute and the adjusted basis of property you contribute to the activity.
- Your share of the activity’s taxable income for the year.
- Recourse debt — amounts borrowed for the activity where you are personally liable for repayment.
- Amounts borrowed where you’ve pledged property not used in the activity as collateral.
The following decrease it:
- Losses you’ve deducted from the activity in prior years.
- Cash or property withdrawn or distributed from the activity.
If the year’s loss is less than or equal to your at-risk amount, the full loss clears this hurdle. If it’s larger, the excess is suspended.
Amounts That Do Not Count
Certain financing arrangements are excluded because they don’t expose you to real economic loss:
- Non-recourse loans, where the lender’s only remedy is the collateral, do not increase your at-risk amount unless the real estate exception below applies.
- Amounts protected by a guarantee, stop-loss agreement, or similar arrangement. Ordinary casualty insurance and tort liability coverage do not trigger this exclusion.
- Amounts borrowed from a person who has an interest in the activity other than as a creditor, or from someone related to that person.
The Real Estate Exception
Real estate gets its own carve-out. Non-recourse debt can count toward your at-risk amount if it’s qualified non-recourse financing, which requires:
- The loan is secured by real property used in the activity of holding real estate. Mineral property does not qualify.
- The lender is a bank, savings institution, or other entity that regularly lends money and is not related to the borrower. Federal, state, or local government loans, and government-guaranteed financing, also qualify. Commercially reasonable financing from a related person on substantially the same terms as an arm’s-length loan can also count.
This exception is limited to real estate. It does not help with oil and gas, farming, or any other covered activity.
Where the At-Risk Limit Sits Among the Other Loss Limits
The at-risk limit is one of four tests a business loss has to clear. Order matters, and running them out of sequence produces the wrong number:
- Basis limitation. Partners and S corporation shareholders first test the loss against their tax basis in the entity. Any excess is suspended before Form 6198 ever comes into play.
- At-risk limitation on Form 6198. Losses that survive the basis check are capped at your at-risk amount.
- Passive activity loss limitation on Form 8582, which restricts deductions from activities in which you don’t materially participate.
- Excess business loss limitation on Form 461. For 2026, non-corporate taxpayers cannot deduct aggregate net business losses exceeding $256,000 ($512,000 on a joint return). This limitation was made permanent by the One Big Beautiful Bill Act.
Each layer works independently. A loss can pass the at-risk test and still be blocked by the passive activity rules or the excess business loss cap. Losses suspended at any stage carry forward and re-enter the sequence at the level where they were stopped.
What Happens to Losses Above the Cap
Carryforward
A loss that exceeds your at-risk amount is not lost. It carries forward indefinitely and is treated as a deduction from the same activity in the next tax year. Each year you recompute your at-risk amount, and any increase — from new contributions, income, or additional recourse borrowing — frees up an equal amount of the suspended loss. The suspended loss becomes deductible only when your at-risk amount actually rises. Carrying it forward alone doesn’t help if your economic exposure hasn’t changed.
Recapture
The rules can also claw back losses you’ve already deducted. If your at-risk amount drops below zero at the end of a tax year, you must include the negative amount in gross income for that year. This most often happens when recourse debt is refinanced with non-recourse debt, when you receive large distributions, or when your personal liability is otherwise removed.
The recapture amount is capped at your total previously deducted at-risk losses, reduced by any amounts already recaptured in prior years. The recaptured income is treated as income from the activity, and the same amount becomes an allowable deduction in the following tax year. That mechanism prevents permanent double taxation, but it accelerates income into the year your risk exposure dropped.
Walking Through the Form
Form 6198 has four parts, and most of the work happens in the first three.
Part I calculates the current-year profit or loss from the activity, including any prior-year suspended amounts added back so they’re tested against the current year’s at-risk figure. Partners and S corporation shareholders start from the K-1; sole proprietors and direct participants pull from Schedule C, E, or F.
Part II is a simplified computation of your at-risk amount. You can use it only if you already know your adjusted basis in the activity or your interest in the partnership or S corporation’s at-risk activity. For straightforward cases, such as a single-member LLC with no non-recourse debt, Part II is enough.
Part III is the detailed computation. It walks through every component: contributions, income, recourse debt, non-recourse exclusions, withdrawals, and prior losses. You don’t complete Part II if you use Part III, and the detailed version can produce a larger at-risk amount because it captures items the simplified method misses.
Part IV compares the Part I loss against the at-risk amount from Part II or III. If the loss is equal to or less than the at-risk amount, the full loss goes to your return, still subject to the passive activity and excess business loss limits. If it’s larger, the deduction is capped at the at-risk figure and the rest carries forward.
The allowable loss flows to Schedule C for sole proprietors, Schedule E for rental real estate and other pass-through activities, or Schedule F for farming. Form 6198 itself attaches to Form 1040, or Form 1041 for estates and trusts.
What Skipping the Form Costs
Leaving Form 6198 off a return that requires it puts the burden on you if the IRS later questions the loss. Without a contemporaneous at-risk calculation, you’ll be rebuilding it from records during an audit years later.
If the IRS disallows at-risk losses and the resulting underpayment is large enough, the accuracy-related penalty is 20 percent of the underpayment attributable to a substantial understatement of income tax. For individuals, an understatement is substantial when it exceeds the greater of 10 percent of the tax that should have been shown on the return or $5,000. You can avoid the penalty by showing reasonable cause and good faith, or by adequately disclosing the position on Form 8275, which flags a debatable at-risk position for the IRS. Disclosure doesn’t prevent a challenge, but it removes the penalty exposure if you lose.