Page 202 - Individual Forms & Instructions Guide

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
the amount you could actually lose in But if you answered "No" on line G, Small business taxpayer. You quali-
the business. the passive activity loss rules may apply. fy as a small business taxpayer if you (a)
Check box 32b if you have amounts First, complete Form 6198 to figure the have average annual gross receipts of
invested in this business for which you amount of your profit or (loss) for the $27 million or less for the 3 prior tax
are not at risk, such as the following. at-risk activity, which may include years, and (b) are not a tax shelter (as
• Nonrecourse loans used to finance amounts reported on other forms and defined in section 448(d)(3)).
the business, to acquire property used in schedules, and the at-risk amount for the If your business has not been in exis-
the business, or to acquire the business activity. Follow the Instructions for tence for all of the 3-tax-year period
that are not secured by your own proper- Form 6198 to determine how much of used in figuring average gross receipts,
ty (other than property used in the busi- your Schedule C loss will be allowed. base your average on the period it has
ness). However, there is an exception for After you figure the amount of your loss existed, and if your business has a pred-
certain nonrecourse financing borrowed that is allowed under the at-risk rules, ecessor entity, include the gross receipts
by you in connection with holding real you may need to complete Form 8582 to of the predecessor entity from the
property. figure the loss to enter on line 31. See 3-tax-year period when figuring average
• Cash, property, or borrowed the Instructions for Form 8582 for de- gross receipts. If your business (or pred-
amounts used in the business (or con- tails. ecessor entity) had short tax years for
tributed to the business, or used to ac- If you checked box 32b because any of the 3-tax-year period, annualize
quire the business) that are protected ! some investment is not at risk your business' gross receipts for the
against loss by a guarantee, stop-loss CAUTION and you do not attach Form short tax years that are part of the
agreement, or other similar arrangement 6198, the processing of your return may 3-tax-year period.
(excluding casualty insurance and insur- be delayed. See Pub. 538 for more information.
ance against tort liability).
• Amounts borrowed for use in the At-risk loss deduction. Any loss from Treating inventory as non-incidental
business from a person who has an inter- this business not allowed for 2022 only material or supplies. If you account for
est in the business, other than as a cred- because of the at-risk rules is treated as a inventories as materials and supplies
itor, or who is related under section deduction allocable to the business in that are not incidental, you deduct the
465(b)(3)(C) to a person (other than 2023. amounts paid to acquire or produce the
you) having such an interest. More information. For details, see the inventoriable items treated as materials
Figuring your loss. Before determining Instructions for Form 6198 and Pub. and supplies in the year in which they
your loss, you must check box 32a or 925. are first used or consumed in your oper-
ations.
32b to indicate whether the loss from
your business activity is limited by the Financial accounting treatment of
at-risk rules. Follow the instructions, Part III. Cost of inventories. Your financial accounting
next, that apply to your box 32 activity. Goods Sold treatment of inventories is determined
All investment is at risk. If all with regard to the method of accounting
amounts are at risk in this business, In most cases, if you engaged in a trade you use in your applicable financial
statement (as defined in section 451(b)
check box 32a. If you answered “Yes” or business in which the production,
on line G, your loss will not be reduced purchase, or sale of merchandise was an (3)) or, if you do not have an applicable
financial statement, with regard to the
by the at-risk rules or the passive activi- income-producing factor, you must take
ty loss rules. See Line 31, earlier, for inventories into account at the beginning method of accounting you use in your
books and records that have been pre-
how to report your loss. and end of your tax year. pared in accordance with your account-
But if you answered “No” on line G, Exception for small business taxpay- ing procedures.
you may need to complete Form 8582 to ers. If you are a small business taxpay-
figure your loss to enter on line 31. See er, you can choose not to keep an inven- Changing your method of account-
the Instructions for Form 8582 for de- tory, but you must still use a method of ing for inventory. If you want to
tails. accounting for inventory that clearly re- change your method of accounting for
flects income. If you choose not to keep inventory, you must file Form 3115. For
Some investment is not at risk. If details, see Line F, earlier.
some investment is not at risk, check an inventory, you won't be treated as
box 32b; the at-risk rules apply to your failing to clearly reflect income if your More information. For more infor-
loss. Be sure to attach Form 6198 to method of accounting for inventory mation about this exception, see Pub.
your return. treats inventory as non-incidental mate- 538.
rial or supplies, or conforms to your fi-
If you answered "Yes" on line G, nancial accounting treatment of invento- Certain direct and indirect ex-
complete Form 6198 to figure the loss to ries. If, however, you choose to keep an ! penses may have to be capital-
enter on line 31. The passive activity inventory, you must generally value the CAUTION ized or included in inventory.
loss rules do not apply. See Line 31, ear- inventory each year to determine your See Part II, earlier. See Pub. 538 for ad-
lier, for how to report your loss. cost of goods sold in Part III of Sched- ditional information.
ule C.

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