General Instructions
Purpose of Form
Use Form 6198 to figure:
- The current year profit (loss) from an at-risk activity for 2002 (Part I).
- The amount at risk for 2002 (Part II or Part III).
- The deductible loss for 2002 (Part IV).
The at-risk rules of section 465 limit the amount of the loss you may deduct to the amount at risk.
For more details, see Pub. 925, Passive Activity and At-Risk Rules.
Who Must File
Form 6198 is filed by individuals (including filers of Schedules C, E, and F (Form 1040)), estates, trusts, and certain closely held C corporations described in section 465(a)(1)(B), as modified by section 465(a)(3).
File Form 6198 if during the tax year you, a partnership in which you were a partner, or an S corporation in which you were a shareholder had any Amounts Not at Risk (see this page) invested in an at-risk activity (defined below) that incurred a loss.
At-Risk Activities
The at-risk limitation rules apply to losses from the following activities carried on as a trade or business or for the production of income.
- 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).
Certain equipment leasing activities by closely held C corporations are not subject to the at-risk rules. See sections 465(c)(4), (5), and (6).
4. Exploring for or exploiting oil and gas resources.
5. Exploring for or exploiting geothermal deposits as defined in section 613(e)(2).
6. Any other activity that is not included in 1 through 5 above.
Exception. Holding real property placed in service before 1987 and holding an interest acquired before 1987 in a partnership, an S corporation, or other pass-through entity already engaged in an activity of holding real property before 1987 are not affected by the at-risk rules. This exception does not apply to holding mineral property.
Note: A special exception to the at-risk rules applies to a qualifying business of a qualified C corporation. See Pub. 925 for details.
Amounts Not at Risk
You are not considered at risk for any of the following.
- Nonrecourse loans used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity (unless the nonrecourse loan is secured by your own property that is not used in the activity). However, you are considered at risk for qualified nonrecourse financing secured by real property used in the activity of holding real property (other than mineral property). See Qualified Nonrecourse Financing on this page.
- Cash, property, or borrowed amounts used in the activity that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).
- Amounts borrowed for use in the activity 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. See Pub. 925 for definitions.
- Any cash or property contributed to the activity or to your interest in the activity that is:
- Financed through nonrecourse indebtedness or protected against loss through a guarantee, stop-loss agreement, or other similar arrangement or
- 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. However, this 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.
Until regulations are issued, you do not have to file Form 6198 if you are engaged in an activity included in 6 under At-Risk Activities and you only have borrowed amounts described in 3 under Amounts Not At Risk.
Qualified Nonrecourse Financing
Qualified nonrecourse financing is financing for which no one is personally liable for repayment and is:
- Borrowed by you in connection with holding real property,
- Secured by real property used in the activity,
- Not convertible debt, and
- Loaned or guaranteed by any Federal, state, or local government, or borrowed by you from a qualified person.
See Regulations section 1.465-27 for details, including rules for partnership liabilities and disregarded entities. This section is effective for any financing incurred on or after August 4, 1998, but taxpayers may apply the section retroactively.
A qualified person is a person who actively and regularly engages in the business of lending money (for example, a bank or savings and loan association).
A qualified person is not:
- A person related to you unless the person would be a qualified person but for the relationship and the nonrecourse financing is commercially reasonable and on the same terms as loans to unrelated persons,
- The seller of the property (or a person related to the seller), or
- A person who receives a fee as a result of your investment in the property (or a person related to that person).
Aggregation or Separation of Activities
The IRS has the authority to prescribe regulations to aggregate or separate activities for purposes of the at-risk rules. At the time these instructions went to print, regulations had not been issued for tax years beginning after 2000. Therefore, the rules that follow may change. The IRS will publicize these changes when additional information is available.
File one form if your activities are listed under the aggregation rules. File a separate form for each activity if your activities are listed under the separation rules.
Aggregation rules. All section 1245 properties that are leased or held for lease and placed in service in any tax year of a partnership or an S corporation are treated as one activity. A partner in a partnership or an S corporation shareholder may aggregate and treat as a single activity all of the properties of that partnership or S corporation that are included within each of categories 1, 2, 4, and 5 under At-Risk Activities on page 1.
Activities described in 6 under At-Risk Activities on page 1 that constitute a trade or business are treated as one activity if (a) the taxpayer actively participates in the management of that trade or business or (b) the business is carried on by a partnership or an S corporation and 65% or more of the losses for the tax year are allocable to persons who actively participate in the management of the trade or business. Similar rules apply to activities described in 1 through 5 under At-Risk Activities on page 1.
Separation rules. Your activity with respect to each film, video tape, section 1245 property that is leased or held for lease, farm, holding of real property, oil and gas property (as defined in section 614), or geothermal property (as defined in section 614) that is not aggregated with other activities under the above rules is treated as a separate activity.
Each investment that is not a part of a trade or business is treated as a separate activity.
Specific Instructions
If you are engaged in more than one at-risk activity or in both at-risk activities and not-at-risk activities, you must allocate income, gains, losses, and deductions to each activity.
Partnerships and S corporations must give their partners and shareholders a separate statement of income, expenses, and deductions for each at-risk and not-at-risk activity.
When filling in Parts I, II, and III, enter only amounts that relate to the activity included on this form. Use accepted tax accounting methods to figure the amounts to enter.
If you are a partner or an S corporation shareholder, enter any items for the activity that are from your investment in the activity or were passed through to you on Schedule K-1 or a similar statement.
Description of activity. After the description of the activity, if applicable, enter the name and identifying number of the partnership or S corporation.
Part I - Current Year Profit (Loss) From the Activity, Including Prior Year Nondeductible Amounts
Taxpayers other than partners or S corporation shareholders. If you have losses or deductions from an earlier tax year that you could not deduct because of the at-risk rules, include those amounts on the appropriate form or schedule of your current year tax return before starting Part I. For example, if in 2001 your Schedule C had a $1,500 loss on line 31, but because of the at-risk rules your loss was limited to $500, include the $1,000 on your 2002 Schedule C in Part V, Other Expenses, and identify it as a prior year loss.
Partners and S corporation shareholders. If you have a loss or a deduction from an earlier tax year that you could not deduct because of the at-risk rules, these losses and deductions must be included in the current year amounts you enter in Part I. For example, if in 2001 your Schedule K-1 had a $1,500 loss on line 1, but because of the at-risk rules your loss was limited to $500, include both the $1,000 loss from 2001 and the amount from your 2002 Schedule K-1 on line 1 of Form 6198.
Closely held corporations. A closely held corporation must apply the limitation on the deduction for interest expense under section 163(j) before applying the at-risk limitations.
Line 1
Ordinary Income (Loss)
Taxpayers other than partners or S corporation shareholders. Enter your ordinary income or loss from the at-risk activity without regard to the at-risk limitations. This is the amount you get when you subtract your total deductions (including prior year deductions that were not allowed because of the at-risk rules) from your total income from the activity for the current year.
Do not include on line 1 capital or ordinary gains and losses from the sale or other disposition of assets used in the activity or of an interest in the activity. These amounts, casualty or theft gains and losses, and investment interest expense are entered on lines 2a, 2b, 2c, and 4.
Partners and S corporation shareholders. Enter the amount from line 1 of your current year Schedule K-1 (Form 1065 or Form 1120S) (plus any prior year loss from Schedule K-1, line 1, that you could not deduct because of the at-risk rules). In the case of a partner in an electing large partnership, a partner's share of at-risk activity income or loss may be reported on line 1 or 2 of Schedule K-1 (Form 1065-B), Partner's Share of Income (Loss) From an Electing Large Partnership.
Lines 2a, 2b, and 2c
Gain (Loss)
Combine long- and short-term capital gains and losses and ordinary gains and losses from the sale or other disposition of assets used in the activity or of your interest in the activity. Enter gains and losses without regard to the at-risk limitations, the limitation on capital losses, or the passive activity loss limitations. If more than one item is included on a line, attach a statement describing each item.
Do not include amounts on lines 2a and 2b that are included on line 2c. Enter the form number or schedule letter to the left of the entry space for line 2c. For example, if you file Form 4684, Casualties and Thefts, and carry amounts from that form to Form 4797, Sales of Business Property, either (a) enter the amounts attributable to the activity from Form 4684 on line 2c and enter Form 4684 on the dotted line next to the entry space or (b) enter the amount attributable to the activity carried from Form 4684 to Form 4797 on line 2b. If you carry a loss from Form 4684 to Schedule A (Form 1040), enter on line 2c either the loss from Schedule A or the loss from Form 4684.
Taxpayers other than partners or S corporation shareholders. Include on your current year Schedule D, Form 4797, or other forms and schedules any prior year losses that you could not deduct because of the at-risk rules.
Partners and S corporation shareholders. Include on lines 2a, 2b, and 2c your current year gains and losses and prior year losses attributable to the activity that you could not deduct because of the at-risk rules.
Line 3
Other Income and Gains From the Activity
If you were a partner or S corporation shareholder, include on line 3 other income and gains from Schedule K-1 that you did not include on lines 1 through 2c.
Line 4
Other Deductions and Losses From the Activity
If you were a partner or S corporation shareholder, include on line 4 other deductions and losses from Schedule K-1 that you did not include on lines 1 through 2c.
If you have investment interest expense from your at-risk activity, first complete Form 4952, Investment Interest Expense Deduction, to figure your allowable investment interest deduction.
If you have investment interest expense from other activities on Form 4952, determine the allowable investment interest deduction attributable to the at-risk activity included on line 8 of Form 4952, and enter that amount on line 4 of Form 6198. You must reduce the allowable investment interest deduction on Form 4952 by the amount you carry to Form 6198. If you filed Form 6198 in 2001, include on line 4 of Form 6198 any investment interest expense from 2001 that was limited because of the at-risk rules.
Line 5
Current Year Profit (Loss)
If line 5 shows a current year profit, you may not have to complete the rest of this form. Report all of the income, gains, deductions, and losses shown on lines 1 through 4 on the forms and schedules normally used, and attach them to your tax return. Also attach Form 6198 and keep a copy for your records.
If your current year profit is from a passive activity and you have a loss from any other passive activity, see Form 8582, Passive Activity Loss Limitations, or Form 8810, Corporate Passive Activity Loss and Credit Limitations, whichever applies.
Note: Even if you have a current year profit on line 5, you may have recapture income if you received a distribution or had a transaction during the year that reduced your amount at risk in the activity to less than zero at the close of the tax year. See Pub. 925 for information on the recapture rules.
If line 5 shows a current year loss, your loss may be limited to the income or gains, if any, included on lines 1, 2, and 3. Separate the items of income, gains, deductions, and losses on lines 1 through 4. The income and gains are fully reportable on your tax return. The deductions and losses are allowable (subject to any other limitation such as the passive activity rules) to the extent of the income and gains. To determine the allowable portion of each deduction or loss, divide each deduction or loss from the activity by the total loss from the activity on line 5. Then, multiply the total income and gains by this fraction.
Complete the rest of the form to see how much, if any, of the excess loss may be deducted.
Example. Jill has a Schedule C loss of $4,600 on line 1 and a Schedule D gain of $3,100 on line 2a. Line 5 shows a current year loss of $1,500. Jill reports the $3,100 gain on Schedule D and may deduct $3,100 of the $4,600 loss on Schedule C. Jill completes Part II or Part III of Form 6198 and determines that only $600 of the $1,500 excess loss on line 5 is deductible in the current year. She replaces the $4,600 loss first entered on Schedule C with $3,700 ($3,100 + $600), the total loss allowed in the current year.
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