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