Part II - Simplified Computation of Amount At Risk

Part II is a simplified method of figuring your amount at risk. It may be used only if you know your adjusted basis in the activity or in your interest in the partnership's or S corporation's at-risk activity.

Part III is a longer method of figuring your amount at risk, which may allow a larger amount at risk. You do not need to complete Part II if you use Part III.

Line 6

Adjusted Basis on the First Day of Tax Year

Sole proprietors.   Filers of Schedules C and F (Form 1040) must not reduce the amount on this line by any liabilities. See Pub. 551, Basis of Assets, for rules on adjusted basis.

Partners.   To figure the adjusted basis, see Pub. 541, Partnerships.

S corporation shareholders.   To figure the adjusted basis, see the Instructions for Form 1120S.

Note:   If the partnership or S corporation is engaged in more than one at-risk activity or in both at-risk activities and not-at-risk activities, you must figure the part of your adjusted basis that is allocable to each at-risk activity. See Aggregation or Separation of Activities on page 2 to determine each at-risk activity in which a partnership or S corporation is engaged.

Line 7

Increases for the Tax Year

Do not include the current year income or gains shown on lines 1 through 3.

Include changes during the current tax year in amounts that increase your amount at risk, such as the following.

1. Net fair market value (FMV) of property you own (not used in the activity) that secures nonrecourse loans that were used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity. Include the nonrecourse loans on line 9. Generally, the net FMV is determined when the property is pledged as security for the loan.

   Do not enter the net FMV if (a) the nonrecourse loan was from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest and (b) the activity is described in 1 through 5 under At-Risk Activities on page 1. However, (a) does not apply to an interest of a shareholder in the case of amounts borrowed by a corporation from the shareholder. See Pub. 925 for definitions. If the activity is described in 6 under At-Risk Activities on page 1, you may include these amounts until regulations are issued.

2. Cash and the adjusted basis of other property (determined at the time of the contribution) contributed to the activity during the tax year. However, if you used your own assets to repay a nonrecourse debt and you included an amount in 1 above, the amount included as repayments may not be more than the amount by which the balance of the loan at the time of repayment exceeds the net FMV of property you own (not used in the activity) that secures the debt.
3. Loans used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity for which you are personally liable, and qualified nonrecourse financing (defined on page 1). Do not enter amounts included in 2 above or on line 6.
4. Percentage depletion for this year deducted in excess of the adjusted basis of depletable property for the activity.

Line 9

Decreases for the Tax Year

Do not include the current year deductions or losses shown on lines 1 through 4.

Include changes during the current tax year in amounts that decrease your amount at risk, such as the following.

1. Nonrecourse loans (including recourse loans changed to nonrecourse loans) other than qualified nonrecourse financing (defined on page 1) used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity. Only amounts included on line 6 may be entered on line 9.
2. Amounts, including cash, property, or loans, protected against loss by a guarantee, stop-loss agreement, or other similar arrangement. Enter this amount only if it was included on line 6. Do not include items covered by casualty insurance or insurance against tort liability.
3. Amounts borrowed from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest. This does not apply to an interest of a shareholder in the case of amounts borrowed by a corporation from the shareholder. Enter these amounts only if they were included on line 6 and not included under 1 or 2 above. Until regulations are issued, this applies only to activities described in 1 through 5 under At-Risk Activities on page 1. See Pub. 925 for definitions and more details.
4. Withdrawals and distributions during the tax year - both cash and the adjusted basis of noncash items (less nonrecourse liabilities to which the noncash items are subject) - including assets used in the activity to repay certain debts.
5. Nonrecourse liabilities included on line 6 of property you contributed to the activity.

Line 10b

Amount At Risk

If the amount on this line is smaller than your overall loss from the activity (line 5), you may want to complete Part III to see if Part III gives you a larger amount at risk.

Note: If the amount on line 10b is zero, you may be subject to the recapture rules. See Pub. 925.

Part III - Detailed Computation of Amount At Risk

If you completed Part III of Form 6198 for this activity for 2001, skip lines 11 through 14. Then, see the instructions for lines 15,16, and 18 to determine the amounts to enter on those lines.

If the activity began on or after one of the effective dates shown below and you did not complete Part III of Form 6198 for this activity for 2001, skip lines 11 through 14. Enter zero on line 15 and complete the rest of Part III.

Effective Dates

Generally, the effective date is the first day of the first tax year beginning after 1975 if the activity is one of the following.

• Holding, producing, or distributing motion picture films or video tapes.
• Farming as defined in section 464(e)(1).
• Leasing any section 1245 property, as defined in section 1245(a)(3).
• Exploring for or exploiting oil and gas resources.

If the activity is exploring for or exploiting geothermal deposits as defined in section 613(e)(2), the effective date is usually October 1, 1978, for wells started after September 30, 1978. Generally, a well started before October 1, 1978, is not subject to the at-risk rules.

The activity of holding real property is subject to the at-risk rules for property placed in service after 1986, and for an interest acquired after 1986 in an S corporation, partnership, or other pass-through entity engaged in an activity of holding real property. An activity of holding real property does not include the holding of mineral property. Holding mineral property may be subject to at-risk limitations other than the special rules that apply to activities of holding real property.

In most cases, the effective date for all other at-risk activities is the first day of the first tax year beginning after 1978.

If you are a partner or an S corporation shareholder, the date you became a partner or shareholder may determine whether you are subject to the at-risk rules.

Line 11

Investment in the Activity at the Effective Date

Use the Line 11 Worksheet below to figure your investment in the activity at the effective date. Enter all amounts as of the effective date. Do not complete the worksheet if you are a partner or an S corporation shareholder. Instead, enter on line 11 the basis of your investment in the partnership or S corporation at the effective date. If the partnership or S corporation is engaged in both at-risk and not-at-risk activities, allocate your investment between the at-risk and not-at-risk activities. Enter the part that is allocable to the at-risk activity on line 11.

Line 11 Worksheet Instructions

Lines 3a and 3b of the worksheet. See the instructions for line 16, item 2, beginning on page 6 for the rules on basis. Generally, the amounts for lines 3a and 3b of the worksheet may be taken directly from your depreciation schedule. Use the depreciation schedule you filed at the effective date, not the schedule for the current tax year.

  

Line 12 Worksheet

Line 10b of the worksheet.   If you use a reserve for bad debts, subtract from your accounts receivable the balance of the reserve on the effective date. But only subtract up to the amount you were allowed as a deduction under repealed section 166(c) for years before the effective date.

Line 12

Increases at Effective Date

Enter your share of amounts such as the following.

1. Net FMV of your own property (not used in the activity) that secures nonrecourse loans used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity that will be included on line 14. Generally, the net FMV is determined when the property is pledged as security for a loan. Do not enter the net FMV if (a) the nonrecourse loan was from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest and (b) the activity is described in 1 through 5 under At-Risk Activities on page 1. However, (a) does not apply to an interest of a shareholder in the case of amounts borrowed by a corporation from the shareholder. If the activity is described in 6 under At-Risk Activities on page 1, you may include these amounts until regulations are issued.
2. Total losses from years before the effective date for which there were equal or greater amounts not at risk at year end. Use the Line 12 Worksheet and its instructions on the next page to figure this amount.

Make all entries on a year-by-year basis. Include amounts only for years before the effective date. Do not accumulate totals of earlier losses or nonrecourse debts.

If you took a deduction for percentage depletion for an item of depletable property in excess of the adjusted basis of the property in a year for which you had a loss for the activity, subtract the amount of the excess from the loss for that year.

Line 14

Decreases at Effective Date

Enter your share of amounts such as the following.

1. Nonrecourse loans outstanding at the effective date used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity, including recourse loans changed to nonrecourse loans. Enter this amount only if it was included on line 11.
2. Amounts, including cash, property, or loans, protected against loss by a guarantee, stop-loss agreement, or other similar arrangement outstanding at the effective date. Enter this amount only if it was included on line 11. Do not include items covered by casualty insurance or insurance against tort liability.
3. Amounts outstanding at the effective date borrowed from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest. This does not apply to an interest of a shareholder in the case of amounts borrowed by a corporation from the shareholder. Enter these amounts only if they were included on line 11 and not included under 1 or 2 above. Until regulations are issued, this applies only to activities described in 1 through 5 under At-Risk Activities on page 1. See Pub. 925 for definitions and more details.
4. If you are not an S corporation shareholder, also include liens and encumbrances on property you contributed to the activity that are included on line 11. If you are an S corporation shareholder, do not include any loans that were assumed by the corporation or that were liens or encumbrances on property you contributed to the corporation if the corporation took the property subject to the debt.

Line 15

Amount At Risk

If you completed Part III of Form 6198 for 2001:

• Check box b and
• Enter the amount from line 19b of the 2001 form on this line.

Line 16 Worksheet

Do not enter the amount from line 10b of the 2001 form. Do not include on this line any amounts that are not at risk.

Line 16

Increases

If you completed Part III of Form 6198 for 2001:

• Check box b and
• Enter on this line any increases described in 1 through 9 below that occurred since the end of your 2001 tax year.

If you completed Part III of the 2001 form, since effective date means since the end of your 2001 tax year.

Enter your share of amounts such as the following.

1. Net FMV of property you own (not used in the activity) that secures nonrecourse loans that were acquired since the effective date and were used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity. Generally, the net FMV is determined when the property is pledged as security for the loan.

   Do not enter the net FMV if (a) the nonrecourse loan was from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest and (b) the activity is described in 1 through 5 under At-Risk Activities on page 1. However, (a) does not apply to an interest of a shareholder in the case of amounts borrowed by a corporation from the shareholder. See Pub. 925 for definitions. If the activity is described in 6 under At-Risk Activities on page 1, you may include these amounts until regulations are issued.

2. Cash and the adjusted basis of other property contributed to the activity since the effective date. Adjusted basis is the basis that would be used to determine the amount of loss if the property were sold immediately after you contributed it to the activity. See Pub. 551 for details.

   If you are an S corporation shareholder and you contributed property to the corporation subject to a liability, including a liability you are personally required to repay, then you must reduce the total of the adjusted bases of all the property you contributed by the total of all liabilities the property was subject to. This applies whether the corporation took the property subject to, or assumed, the liabilities.

3. Loans for which you are personally liable that were used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity and qualified nonrecourse financing (defined on page 1). Do not enter amounts included in 2 above.
4. Total net income from this activity since the effective date (excess of all items of income received or accrued over the allowable deductions). Do not enter any amount less than zero. Do not include the current year income or gains.

   If you are not an S corporation shareholder, enter the total net income from the activity since the effective date, taking into account only those years the activity had net income. For years since the effective date that the activity had a net loss, see the instructions for line 18, item 5, on page 8.

   If you are an S corporation shareholder, enter your total net income from the activity for profit years since the effective date. Income from the activity includes gain recognized under section 357(c) on contributions of property to the activity. Include all distributions you received from the activity as well as your share of the activity's taxable income.

5. Gain recognized on the transfer or disposition of all or part of the activity or of your interest in the activity since the effective date.
6. Amounts you included in income since the effective date because your amount at risk was less than zero.
7. All money from outside the activity used since the effective date to repay loans included on lines 14 and 18. If, however, you used your own assets to repay a nonrecourse debt and you included an amount in 1 above, the amounts included as repayments may not exceed the amount by which the balance of the loan at the time of repayment exceeds the net FMV of property you own (not used in the activity) that secures the debt.
8. Percentage depletion deducted in excess of the adjusted basis of the depletable property for the activity since the effective date. Use the Line 16 Worksheet below to figure this amount. Be sure to include the amount for the current year.
9. If you are an S corporation shareholder, enter the loans you made to your S corporation since the effective date. Do not include notes that you have given to the activity that are still outstanding.

Line 18

Decreases

If you completed Part III of Form 6198 for 2001:

• Check box b and
• Enter on this line any decreases described in 1 through 8 below that occurred since the end of your 2001 tax year.

If you completed Part III of the 2001 form, since effective date means since the end of your 2001 tax year.

Enter your share of amounts such as the following.

1. Cash, property, or borrowed amounts protected against loss by a guarantee, stop-loss agreement, or other similar arrangement entered into since the effective date. Do not include items covered by casualty insurance or insurance against tort liability. Enter this amount only if it was included on line 16. See the instructions at the beginning of Part III on page 4 for information on effective dates.
2. Amounts borrowed since the effective date from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest. However, this does not apply to an interest of a shareholder in the case of amounts borrowed by a corporation from the shareholder. Enter these amounts only if they were included on line 16 and not included under 1 above. Until regulations are issued, this applies only to activities described in 1 through 5 under At-Risk Activities on page 1. See the instructions at the beginning of Part III on page 4 for information on effective dates.
3. Cash and adjusted basis of other property withdrawn or distributed since the effective date. The adjusted basis is the basis that would be used to figure the loss if the property had been sold by the activity at the time you withdrew it or it was distributed to you.

   If you are an S corporation shareholder and the property is subject to debt that would be included on line 14 (or on this line except for the fact that there are liens or encumbrances on the property in the activity), reduce the basis of the distributed property by the amount of the debt.

   If you are not an S corporation shareholder, reduce the adjusted basis of property withdrawn by the amount, at the time of withdrawal, of any nonrecourse liability to which the property is subject.

   Do not include any money from the activity used to repay loans described in the instructions for line 14 beginning on page 5. Include amounts that were withdrawn and recontributed. Recontributed amounts also must be included on line 16.

   Partners and S corporation shareholders who recognize gain on distributions from the partnership or S corporation must include the distributions on line 18. They also must take them into account as income from the activity on line 16 unless the gain is recognized in the current year.

4. Recourse loans (and qualified nonrecourse financing) changed to nonrecourse loans since the effective date.
5. Total losses from this activity deducted since the effective date. Take into account only those years in which you had a net loss. Do not include current year losses or deductions. Also, do not include losses or deductions you could not deduct because of the at-risk rules.

   Note:   The 2001 line 21 deductible loss reduces your at-risk investment as of the beginning of your 2002 tax year.

6. Nonrecourse liabilities of property you contributed to the activity since the effective date.
7. Any other at-risk amounts included on line 15 that changed to amounts that are not at risk since the effective date.
8. If you are an S corporation shareholder, do not include any loans that were assumed by the corporation or that were liens or encumbrances on property you contributed to the corporation since the effective date if the corporation took the property subject to the debt.

Note:   For loans, enter the amount of the loan you incurred, not the current balance of the loan.

Line 19b

Amount At Risk

If the amount on this line is zero, you may be subject to the recapture rules. See Pub. 925.

Part IV - Deductible Loss

Line 21

Deductible Loss

Note:   When comparing lines 5 and 20, treat the loss on line 5 as a positive number only for purposes of determining the amount to enter on line 21.

If the loss on line 5 is equal to or less than the amount on line 20, report the items in Part I in full on your return, subject to any other limitations such as the passive activity and capital loss limitations. Follow the instructions for your tax return.

If the loss on line 5 is more than the amount on line 20, you must limit your deductible loss to the amount on line 20, subject to any other limitations.

Examples.   (a) If line 5 is a loss of $400 and line 20 is $1,000, enter ($400) on line 21. (b) If line 5 is a loss of $1,600 and line 20 is $1,200, enter ($1,200) on line 21. (c) If line 5 is a loss of $800 and line 20 is zero, enter zero on line 21.

If the amount on line 21 is made up of only one deduction or loss item, report on your return the amount shown on line 21, subject to any other limitations. Follow the instructions for your tax return to determine where to report the amount on your return.

If the amount on line 21 is made up of more than one deduction or loss item in Part I (such as a Schedule C loss and a Schedule D loss), a portion of each such deduction or loss item is allowed (subject to other limitations) for the year. Determine this portion by multiplying the loss on line 21 by a fraction. Figure the fraction by dividing each item of deduction or loss from the activity by the total loss from the activity on line 5. The remaining portion of each deduction or loss item from the activity is disallowed and must be carried over to next year.

Paperwork Reduction Act Notice.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is:

Recordkeeping	1 hr., 12 min.
Learning about the law or the form	1 hr.
Preparing the form	1 hr., 26 min.
Copying, assembling, and sending the form to the IRS	20 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. See the instructions for the tax return with which this form is filed.

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