Everybody plans to go into business to make a profit. Unfortunately, this is not always guaranteed. And when things go south for your small business, you’ll have to find a way to cut your losses. One of the options you can do is to get a tax deduction.
Tax deductions can lower your tax bill and offset losses from unsuccessful business ventures. However, the IRS imposes restrictions on deducting business investments to ensure deduction of personally liable amounts, known as “at-risk” funds.
To help figure out what this amount is, you can learn how to write IRS Form 6198. This article will guide you through at-risk limitations and how they can help you during a difficult time.
Table of Contents
Guide on How to Write a Form 6198
Drafting IRS form 6198 is a good skill to have so you can determine the maximum deductible amount after a loss in your invested business throughout the tax year. Four sections in the form allow you to do the following:
- Identify your losses for the current year
- Compute the amount at risk in the business
- Calculate the previous years’ at-risk deductions that you can apply in the existing year
- Determine your total allowable deduction for the current tax year
When you are ready to file form 6198, make sure to file a different form for every business activity. If you have an S Corporation, you can aggregate your investments in one form.
Download IRS Form 6198 Template
If you need to find assistance in filling the form faster, the best thing to do is to use a template.
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Form 6198 – At-Risk Limitations 2020
Components of a Standard Form 6198
Before you get started in 6198 form creation, it’s important that you know the components of a standard form 6198. These include the following:
Part I – Current Year Profit (Loss) from the Activity, Including Prior Year Nondeductible Amounts
This part includes the following lines:
- Line 1 – Ordinary income (loss)
- Lines 2a, 2b, and 2c – Gain (loss)
- Line 3 – Other income and gains from the activity
- Line 4 – Other deductions and losses from the activity
- Line 5 – Current year profit (loss)
Part II – Simplified Computation of Amount at Risk
This part contains a simplified method so you can figure out your amount at risk. You can use this only if you know your adjusted basis in the at-risk activity.
- Line 6 – Adjusted basis on the first day of the tax year
- Line 7 – Increases for the tax year
- Line 8 – Add lines 6 and 7
- Line 9 – Decreases for the tax year
- Lines 10a and 10b – Amount at risk
Part III – Detailed computation of amount at risk
Meanwhile, Part III is a longer method so you can figure out your amount at risk. If you use Part III, you won’t need to complete Part II.
- Line 11 – Investment in the activity at the effective date
- Line 12 – Increases at effective date
- Line 13 – Add lines 11 and 12
- Line 14 – Decreases at effective date
- Line 15 – Amount at risk
- Lines 16a and 16b – Increases since the effective year and end of the prior year
- Line 17 – Add lines 15 and 16
- Lines 18a and 18b – Deceases since the effective year and end of the prior year
- Line 19 – Subtract line 18 from line 17
Part IV – Deductible Loss
- Line 20 – Amount at risk
- Line 21 – Deductible loss
The above-mentioned are some of the things you need to know when you are trying to learn how to create form 6198. However, this should not be taken as tax advice.
Best Strategies When Drafting a Form 6198
Remember that when you are creating form 6198, there are some things that you should do to make the process easier:
- You need to accomplish a separate workbook for every entity or activity that is subject to at-risk rules.
- Before you fill up Parts II and III of form 6198, you have to complete Lines 1 to 24. This is because the information you provide in these two parts will be based on these lines.
- If your losses are limited by at-risk rules, you will need to include a statement behind the form so that allowed and disallowed losses can be detailed.
You should hire a lawyer to help you complete form 6198, especially if you do not have experience filling one up by yourself.
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