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Understanding at-risk limitations for K-1 losses in Lacerte

by Intuit•1• Updated 2 months ago

For more Schedule K-1 resources, check out our Tax topics page for Schedule K-1 where you'll find answers to the most commonly asked questions.

This article will help you understand at-risk limitations for K-1 losses and how Lacerte calculates allowable loss amounts. See the related topics at the end of this article for more information.

What are at-risk limitations?

The at-risk limitation is the second of three limitations applied to income-producing activities. The losses must apply in the order listed:

Basis limit
At-risk limit
Passive limit

The at-risk limit is similar to the basis limit in that one of the major components of the amount at-risk is the amount invested in the activity. Under the basis limitation, losses are limited to the amount invested in the activity. However, under the at-risk limitation, losses are limited to the amount an investor actually put at-risk. This can differ from the amount invested due to loan guarantees, stop-loss agreements, or nonrecourse loans.

Example

A partner increases his adjusted basis for his share of nonrecourse loans. Nonrecourse loans are loans for which no partner is personally liable. Since the partner isn't personally liable for the nonrecourse loans, he isn't considered "at-risk" for the loan, so the amount of losses allowed under the basis limitations will be higher by the amount of the nonrecourse loan.

Some nonrecourse loans, called qualified nonrecourse financing, do increase the amount at-risk. Qualified nonrecourse financing are loans that are secured by real estate that's used in the activity.

How are at-risk limitations calculated?

The at-risk limits are computed on Form 6198. If partner or shareholder distributions cause the amount at-risk to become negative, gain is recognized to the extent losses have been allowed by at-risk in prior years and have not already been recaptured. The amount of at-risk recapture is carried over to following year as a deduction, and will be allowed as a deduction in the following year if the amount at-risk increases. (IRC 465(d)).

How do I generate Form 6198 for at-risk limitations?

Follow these steps to calculate at-risk limitations for a K-1 activity:

Go to Screen 20, Passthrough K-1's.
Select the appropriate Partnership Information or S Corporation Information section from the left navigation.
Select Amount at Risk (6198) from the lower-left Sections list.
Enter a 1 or 2 in 1=simplified computation, 2=detailed computation (MANDATORY).
- This entry is required to generate Form 6198, At-Risk Limitations.
- Enter 1 to complete Part II of form 6198. Part II may only be completed when you know the adjusted basis in the K-1 activity.
- Enter 2 to complete Part III of form 6198. Part III is a longer method of figuring your amount at-risk and may allow a larger amount at-risk.
If you're using the simplified computation, enter the Adjusted basis at beginning of year. No other entries are needed.
If you're using the detailed computation, leave Adjusted basis at beginning of year blank. Then, scroll down to the Detailed Computation (6198 Part III) subsection and complete any applicable fields.

Lacerte will use your entries to generate the Federal At-Risk Limitation Worksheets and complete Form 6198 when applicable. If the losses are limited by at-risk rules, the program will proforma (or roll over) the amounts to the next year's return.

Program details

Lacerte will determine the amount at risk when indicated in the following activity screens:

Partnership Schedule K-1

On Screen 20.1, Partnership Information, within the Amount at Risk (6198) section, enter a 1 or 2 in the field 1=simplified computation, 2=detailed computation (MANDATORY) (code 158).

This entry is required to generate Form 6198, At-Risk Limitations.
Enter 1 to complete Part II of form 6198. Part II may only be completed when you know the adjusted basis in the K-1 activity.
Enter 2 to complete Part III of form 6198. Part III is a longer method of figuring your amount at-risk and may allow a larger amount at-risk.

A shareholders losses and deductions are subjected to three limitations: basis, at-risk, and passive. The limitations are applied in the above order, and once a loss has been allowed by a limitation, that limitation never gets reapplied. For example, if a loss is allowed by the basis limits, but disallowed by the at-risk limits, the resulting at-risk carryover can be allowed the following year if the amount at-risk increases, even if the basis in S-corporation is zero.

Losses and at-risk carryovers are allowed to the extent of current year income from the activity. Any excess of losses and at-risk carryovers over income from the activity is then limited to the amount at-risk. Per the instructions, there can be cases where losses and at-risk carryovers are allowed in a year that zero or even negative ending at-risk is computed.

In computing Form 6198 , the program first combines any basis carryovers with current year income or loss, and subjects the total to the basis limitations, if the basis limits have been triggered. Basis limitation is triggered by input beginning basis in Adjusted basis at beginning of year (code 162).

The amount allowed by the basis limits then gets combined with any at-risk carryovers and carried to Part I of Form 6198. If line 5 of Form 6198 is income, then all at-risk carryovers are allowed in full. If line 5 of Form 6198 is a loss, then the allowable loss is the lower of the loss or the amount at-risk.

Schedule C

On Screen 16, Business Income (Schedule C), within the Other Information section, you can enter an amount in the Amount at risk (blank = all) (code 11) field.

Enter the total amount at risk in this business as a positive number. If the Schedule C has a loss, the program limits the loss to the amount entered and checks the At Risk box on Schedule C. When the loss is limited, you must manually prepare Form 6198 and attach it to the return. If you leave this field blank, the program treats the taxpayer's full investment as at risk and checks the All Investment is At Risk box.

Schedule E, page 1

On Screen 18, Rental & Royalty Income (Schedule E), within the Other Information section, you can enter an amount in the Amount at risk (blank = all) (code 49) field.

Enter the total amount at risk in this property as a positive number. If the Schedule E has a loss, the program limits the loss to the amount entered and checks the At Risk box. You must prepare and attach Form 6198 manually when the taxpayer has amounts at risk. When you leave this field blank, the program treats the taxpayer's full investment as at risk. When the activity is passive, the program carries prior year unallowed losses to Form 8582 and worksheets.

Schedule F / Form 4835

On Screen 19, Farm Income (Schedule F/Form 4835), within the General Information section, you can enter an amount in the Amount at risk (blank = all) (code 4) field.

Enter the amount the taxpayer has at risk in this activity as a positive number. If the Schedule F has a loss, the program limits the loss to the amount entered and checks the At Risk box. When you leave this field blank and Schedule F has a loss, the program assumes the taxpayer's full investment is at risk and checks the All Investment Is At Risk box. If there is an amount not at risk, you must prepare Form 6198 manually and attach it to the tax return. When the activity is passive, the program carries prior year unallowed losses to Form 8582 and worksheets.

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