Form 6198 at-risk rules guide for 2026 entity owners

Form 6198 at-risk rules matter whenever an entity owner expects to deduct a business, rental, Partnership, or S Corporation loss. The rules are not limited to tax shelter fact patterns. They can affect owners who use borrowed money, nonrecourse financing, guarantees, related-party debt, stop-loss agreements, or pass-through losses that look deductible before the loss limitation order is applied.

The IRS says Form 6198 is used to figure the profit or loss from an at-risk activity for the current year, the amount at risk for the current year, and the deductible loss for the current year. That makes Form 6198 a planning tool, not just a return attachment. If the advisor knows in May that a client may have a loss, there is time to review financing, entity documents, and prior-year suspended losses before preparing the return.

Publication 925 is the primary IRS resource on passive activity and at-risk rules. It states that the at-risk rules limit losses from most activities to the amount at risk in the activity. It also states that taxpayers must apply at-risk rules before passive activity rules. For entity owners, that ordering can change the tax projection. At-risk rules may still limit a loss that survives basis review before passive activity rules are even tested.

How Form 6198 at-risk rules work in 2026

Form 6198 answers three practical questions. First, what is the current-year profit or loss from the activity? Second, how much does the taxpayer have at risk in that activity? Third, how much of the loss is deductible this year? If the loss is greater than the amount at risk, the excess is not currently deductible under the at-risk rules.

The Instructions for Form 6198 state that section 465 at-risk rules limit the amount of loss a taxpayer can deduct to the amount at risk. Publication 925 explains that a loss disallowed because of at-risk limits is treated as a deduction from the same activity in the next tax year. If the taxpayer's at-risk amount increases later, suspended losses may become deductible, subject to other limitations such as passive activity rules.

Entity owners should understand that "at risk" is not the same as "invested." A taxpayer may contribute cash or property and be at risk for that amount. A taxpayer may also be at risk of borrowed amounts if they are personally liable for repayment or pledge property outside the activity as security. But amounts can be excluded if the taxpayer is protected against loss through nonrecourse financing, guarantees, stop-loss agreements, or similar arrangements.

This is why Form 6198 review belongs in the planning file. The tax result depends on the economics of the owner's exposure to loss, not just the accounting loss reported by the entity. Advisors need the financing documents, guarantees, contribution records, distribution history, and prior-year Form 6198 details before treating the loss as available. Activities that include Depreciation and amortization require careful review because deductions can outpace the owner's actual at-risk amount.

Who must file Form 6198 for entity losses

The Instructions for Form 6198 state that the form is filed by Individuals, Trusts & Estates and certain closely held C Corporations. The filing requirement applies when the taxpayer, a Partnership in which the taxpayer was a partner, or an S Corporation in which the taxpayer was a shareholder, had amounts not at risk invested in an at-risk activity that incurred a loss.

Publication 925 gives a similar rule. Taxpayers file Form 6198 with their return if they have a loss from any part of an activity covered by the at-risk rules and they are not at risk for some of their investment in the activity. The form can also be required for certain activities when borrowed amounts are excluded from at-risk amounts.

Advisors should flag Form 6198 review when these facts appear:

• The client has a current-year loss from a Partnership interest, S Corporation shareholding, rental, or business activity.
• The activity uses nonrecourse financing or debt secured only by activity property.
• The owner has guarantees, reimbursement rights, or stop-loss protection.
• The financing comes from a related person or another person with an interest in the activity.
• The client has prior-year losses suspended by at-risk limits.

The trigger is not merely whether the return software asks for a form. The trigger is whether the owner has economic exposure to the loss. If the owner is protected from loss, or if debt does not create true at-risk exposure, the advisor should not assume the loss is deductible. For Individuals running rental real estate operations, the at-risk review must consider whether qualified nonrecourse financing applies before treating any loss as currently deductible.

At-risk rules before passive activity limits

The order of loss limitations is one of the most important parts of Form 6198 planning. Publication 925 states that partners and S Corporation shareholders may be subject to separate limits on their distributive share of deductions or losses. Those limits apply in order: basis limitations, at-risk rules, passive activity rules, and then the excess business loss limitation under section 461.

That order matters because each layer answers a different question. Basis asks whether the owner has enough tax basis in the Partnership interest, S Corporation stock, or shareholder loans. At-risk rules ask whether the owner is economically exposed to loss. Passive activity rules ask whether the activity is passive and whether passive income is available. The excess business loss limitation may apply after those earlier limitations are applied.

For example, an S Corporation shareholder may have a stock basis for a loss but still fail the at-risk test because debt or reimbursement arrangements reduce the amount at risk. A real estate investor may have a loss that passes the at-risk test because qualified nonrecourse financing counts in the real property activity, but the passive activity rules may still defer the loss. The advisor needs to model the layers in sequence.

This is where mid-year planning helps. A projected loss is only useful in a tax estimate if it survives the applicable limitation rules. If the loss is limited at the at-risk layer, the owner may owe more tax than the draft projection suggests. Investors holding Oil and gas deduction interests should pay particular attention because intangible drilling costs and other deductions may be limited at the at-risk layer.

What counts as an amount at risk

Publication 925 states that a taxpayer is at risk in an activity for money and the adjusted basis of property contributed to the activity. The taxpayer is also at risk for amounts borrowed for use in the activity if the taxpayer is personally liable for repayment or pledges property other than property used in the activity as security. The amount at risk for pledged property is based on the net fair market value of the taxpayer's interest in that property.

The rules also prevent double-counting. Publication 925 cautions that if a taxpayer borrows money to finance a contribution to an activity, the taxpayer cannot increase the at-risk amount by both the contribution and the amount borrowed to finance that contribution. The at-risk amount may increase only once.

Qualified nonrecourse financing is a special real property rule. Publication 925 states that a taxpayer is considered at risk for qualified nonrecourse financing secured by real property used in the activity of holding real property. The financing must generally be borrowed in connection with holding real property, secured by real property used in the activity, not convertible into an ownership interest, and loaned or guaranteed by a government or borrowed from a qualified person.

For planning purposes, advisors should build the amount-at-risk schedule from source documents. The file should show cash contributions, property contributions, personal liability for debt, pledged outside property, qualified nonrecourse financing, distributions, allowed losses, and any reductions in exposure. The conclusion should be traceable without asking the client to reconstruct financing years later.

Amounts not at risk, entity owners should review

Amounts not at risk are the items most likely to create surprises. Publication 925 states that taxpayers are not considered at risk for amounts protected against loss through nonrecourse financing, guarantees, stop-loss agreements, or other similar arrangements. The Instructions for Form 6198 also list cash, property, or borrowed amounts protected against loss by guarantee, stop-loss agreement, or similar arrangement as amounts not at risk.

Common amount-not-at-risk fact patterns to review:

1. Nonrecourse financing in which the lender's only recourse is to the activity property.
2. Borrowing from a related party who also holds an interest in the activity.
3. Stop-loss agreements that protect the owner from economic downside.
4. Reimbursement arrangements that backstop the owner's contribution.
5. Pledged property that overlaps with property used in the activity.

Nonrecourse financing is financing for which the taxpayer is not personally liable. If the lender's only recourse is to the taxpayer's interest in the activity or property used in the activity, the loan generally does not create at-risk exposure unless a specific exception applies. That is a common issue across real estate, equipment, and investment-entity structures.

Related-party borrowing can also change the answer. Publication 925 explains that even if a taxpayer is personally liable or secures debt with outside property, amounts borrowed from a person having an interest in the activity, or from someone related to a person having an interest in the activity, may not count as at risk unless an exception applies. Advisors should review lender identity and relationship facts, not just the note balance. Stop-loss and reimbursement arrangements deserve the same attention. The best review asks who actually bears the downside if the activity fails.

How Form 6198 affects mid-year tax planning

Form 6198 can materially affect estimated taxes by changing whether a projected loss is deductible. If a client expects a large pass-through or rental loss, the advisor should not reduce the estimated payments for Q2 or Q3 until the amount-at-risk position has been reviewed.

A useful mid-year estimate should show at least two views:

• A projection that assumes the full business or entity loss is deductible after basis and at-risk review.
• A projection that suspends the loss at the at-risk layer and carries it forward to a later year.
• A note about the unresolved document review if the client has qualified nonrecourse financing, related-party debt, or reimbursement arrangements.
• An overlay of related strategies, such as Vehicle expenses and Travel expenses, that affect the same business activity.
• A coordinated review of Home office and Meals deductions that influence the activity's net loss.

If the client has qualified nonrecourse financing, related-party debt, or reimbursement arrangements, the estimate should include a note about the unresolved document review. This keeps the client from treating a tentative loss as guaranteed. It also gives the advisor a clear next action: collect the financing documents, verify economic exposure, and update the projection before year-end.

The strongest planning files connect the Form 6198 analysis to client decisions. If the loss is limited, the client may need to adjust estimated payments, defer distributions, review financing, or revisit the activity's cash needs. If the loss is allowed, the file should still show why the owner was at risk.

Form 6198 mistakes entity owners should avoid

The first mistake is assuming that a cash investment always equals the amount at risk. Cash contributed to an activity generally increases the at-risk amount. Still, it can be reduced by allowing losses, distributions, changes in debt, or arrangements that protect the owner from loss. A current-year snapshot may miss reductions from earlier years.

Other common mistakes include:

• Applying passive activity limits before at-risk limits.
• Counting nonrecourse debt as at risk without checking the real property qualified nonrecourse financing exception.
• Ignoring related-party lender rules.
• Failing to carry forward losses suspended by at-risk limits.
• Using entity-level debt balances without testing the owner's actual economic exposure.

Another mistake is reviewing Form 6198 only after the K-1 arrives. By then, the owner may already have made estimated tax payments, distributions, or financing decisions based on an assumed loss. A mid-year review gives the advisor time to explain whether the loss is available, limited, or dependent on facts that still need support.

Advisors should also avoid promising that a change in financing will automatically create an at-risk amount. The debt must be reviewed under the at-risk rules, related-party rules, and any applicable qualified nonrecourse financing exception. If the facts are uncertain, the recommendation should be caveated until documents are reviewed.

Form 6198 records advisors should document

A strong Form 6198 file should show how the owner's amount at risk was calculated and why the deductible loss was allowed or limited. The workpaper should not only repeat the number from the return. It should show the source of each increase, decrease, exclusion, and carry-forward.

Key records include:

1. Prior-year Form 6198, suspended at-risk losses, and beginning amount-at-risk schedule.
2. Capital contribution records, property contribution support, and adjusted basis calculations.
3. Loan agreements, guarantees, collateral documents, lender identity, and related-party notes.
4. Qualified nonrecourse financing support for real property activities, if applicable.
5. Current-year losses, allowed deductions, distributions, debt changes, and ending at-risk calculation.

The file should also show how at-risk rules interact with the other limitation layers. If the owner is a partner or S Corporation shareholder, document the basis review first. If the activity is passive, document the passive activity review after the at-risk calculation. If the client is subject to excess business loss rules, document that layer after the passive activity result.

The Form 6198 instructions outline the calculation order and the categories of amounts at risk and not at risk. Aligning the workpaper to that sequence keeps the conclusion easy for any later reviewer to retrace.

Protect entity loss deductions with at-risk limitation planning

If your firm advises entity owners with pass-through, rental, or business losses, Form 6198 should be part of the annual loss limitation workflow rather than a return-preparation surprise. The hardest part of an at-risk file is rarely the formula. It is the financing documents, guarantees, related-party reviews, and facts regarding qualified nonrecourse financing that determine whether the loss survives the at-risk test before the passive activity rules even apply.

Instead's comprehensive tax platform brings the at-risk rollforward, the loss limitation order, and the supporting documentation into a single workflow. Use Instead to model tax savings across allowed, suspended, and carryforward scenarios, manage tax reporting for entity owners and individual filers, update tax estimates as financing or activity facts shift, organize tax documents like loan agreements, guarantee records, and contribution support, complete tax research on the basis-then-at-risk-then-passive ordering, prepare tax workpapers that tie each amount-at-risk movement to a source document, monitor planning activity across the client roster, and choose the right pricing plans for the firm's entity work. Join Inst

Frequently asked questions

Q: What is Form 6198 used for?

A: Form 6198 is used to figure the profit or loss from an at-risk activity, the amount at risk for the current year, and the deductible loss for the current year.

Q: Who must file Form 6198?

A: Individuals, Trusts & Estates, and certain closely held C Corporations may file Form 6198 when they have a loss from an at-risk activity and are not at risk for some of their investment.

Q: Do at-risk rules apply before passive activity rules?

A: Yes. Publication 925 states that at-risk rules apply before passive activity rules. For partners and S Corporation shareholders, basis limitations generally take precedence over at-risk rules.

Q: What amounts are at risk?

A: Amounts at risk generally include money and adjusted basis of property contributed to the activity, plus certain borrowed amounts when the taxpayer is personally liable or pledges outside property as security.

Q: Is nonrecourse debt at risk?

A: Generally, nonrecourse debt is not at risk because the taxpayer is not personally liable. A special exception can apply for qualified nonrecourse financing secured by real property used in a real property activity.

Q: What records support Form 6198?

A: Useful records include prior-year Form 6198, suspended losses, contribution records, loan documents, guarantees, collateral records, qualified nonrecourse financing support, distributions, and at-risk workpapers.