This article will help you understand at-risk limitations for K-1 losses and how ProConnect Tax 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.
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 calculate at-risk limitations in the program?
Follow these steps to calculate at-risk limitations for a K-1 activity:
- Go to the Input Return tab.
- From the left of the screen, select Income and choose Passthrough K-1's.
- Select the appropriate passthrough K-1 screen from the dropdown menu:
- Partnership Info (1065 K-1), or
- S-Corp Info (1120S K-1)
- Click the three vertical dots at the top of the screen and choose At-Risk from the dropdown menu.
- Locate the Amount at Risk (6198) section.
- Enter a 1 or 2 in 1=simplified computation, 2=detailed computation (MANDATORY).
- 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.
ProConnect Tax 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.