Posted by Fred Lake

Understanding IRS Form 6198: At-Risk Limitations

Understanding IRS Form 6198: At-Risk Limitations

The sole purpose of anyone venturing into business is to make a profit. There are, however, times when a company cannot make a profit. In such cases, a tax deduction comes as a saving grace for such business. Uncle Sam has some provisions for people’s business that helps deduct what they spend on their business to some limit.

This is where form 6198 comes in. With it, you get to figure out what you can deduct when a portion of your investment is classified into the “at-risk” category.

 

What Are “at-risk” Limitations?

The main idea behind a tax deduction is to limit your overall tax bill. This offers some cushioning effect on losses incurred in a business. It could be property repairs, insurance, charitable donations, etc. All these are deductible provided they help your business. 

However, you cannot deduct the entire money you invest in a business according to the IRS at-risk limitations. Due to this limitation, taxpayers cannot deduct any amount that exceeds their stake when in business. As a result, for taxes, they only consider funds in which they are liable for "at-risk," which makes it tax-deductible.


Breakdown of Form 6198

Form 6198 helps you estimate the maximum amount you are eligible to deduct due to a business loss in a tax year. With the sections of the form, you can:

  • Estimate your loss for the year

  • Estimate the value of what is at stake in the business

  • Deduce any at-risk deduction from past years that you can apply now. 

  • Determine the total allowable deduction you can take for the current tax year.

Every business activity requires a separate Form 6198. This, however, does not apply to the S Corps because Uncle Sam allows them to bring all their investments together in a single form.

You would have to file Form 6198 with your tax return if you had a loss in an income-producing venture that Uncle Sam classifies as at risk. This at-risk limitation applies to many business activities.


What Necessitates the at-risk Rules?

Before implementing at-risk limitations, people in some business niches (real estate mostly) were at more advantage from tax deductions and business losses. The value of the deduction's gain was way more than what they will have from their investment.

In a bid to prevent investors from excessive benefits of intentional horrible business deals, Congress came up to limit deductions business investors qualify for in times of business losses. This also serves to encourage investment in incredible business ventures.


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