Startups
- Business Structures
- Tax Identification Numbers
- Accounting Methods
- Income
- Converting Personal Use Property to Business Use
- Your Tax Year
- Your Books and Records
- Passive Activity Rules
- At Risk Rules
- What is a Small Business?
- Qualifying Small Business (QSB) Stock (Section 1202)
- Section 1244-Losses on Small Business Stock
More Tax Topics
- Business Structures
- Start-up Costs
- Depreciation
- Car Expenses
- Home Office Deduction
- Travel Expenses
- Hiring Workers
- Meals and Entertainment
- Retirement
- Top Tax Myths
- Per Diem Rates - IRS Publication 1542 Oct 2011 for Travel Within the Continental U.S (for employers who pay a per diem allowance to employees)
Quick Links
Hot Topics
Need Some Deductions for 2011?
Don't overlook these!
Updated for 2011
Passive Activity Rules
Who Do Passive Activity Rules Apply To?
Passive activity rules apply to:
- Individuals
- Estates
- Trusts (other than grantor trusts)
- Personal service corporations, and
- Closely held corporations.
Investors
Work you do in your capacity as an investor does not constitute participation unless you are directly involved in the day-to-day management or operations of the activity.
For example, the following work by an investor does not constitute participation:
- Studying or reviewing financial statements or reports on the operations of the activity, or
- Preparing summaries or analyses of the finances of the operations for your own use, or
- Monitoring the finances or operations in a nonmanagerial capacity.
Purpose of Passive Activity Rules
The passive activity rules are designed to prevent passive activity losses from being deducted from a taxpayers nonpassive income, such as wages, interest and dividends.
In addition, passive activity credits may only be deducted from the tax on passive activity income.
Passive activity credits include the general business credit and other special business credits, such as the credit for fuel produced from a nonconventional source.
What is a Passive Activity?
There are two kinds of passive activities:
- Trade or business activities in which you do not materially participate during the year.
- Rental activities, even if you do materially participate in them, unless you are a real estate professional.
Exception for real estate nonprofessionals:
Although rental activities are always considered passive activities (except for real estate professionals), a special rule allows real estate nonprofessionals to classify up to $25,000 of rental losses as nonpassive.
This means you can deduct up to $25,000 of rental losses from your other, nonpassive income. You must actively participate in the activity. It's easy to qualify for the special $25,000 allowance.
Here's how the Internal Revenue Code defines a passive activity:
Section 469(c) of the Internal Revenue Code defines a Passive Activity:
In general - The term "passive activity" means any activity - which involves the conduct of any trade or business, and in which the taxpayer does not materially participate.
Tax Forms You May Need to File
The following tax forms apply to passive activity loss limitations and passive activity credit limitations:
- Form 8582, Passive Activity Loss Limitations
- Form 8582-CR, Passive Activity Credit Limitations
Next:
Passive Activity Rules: Material Participation; Proof of Participation
Related Links
- Passive Activity and At-Risk Rules
- Qualifying for Material Participation
- Seven Material Participation Tests
- Significant Participation Passive Activities
- Passive Income and Losses
- Rental Real Estate
- Special $25,000 Allowance for Real Estate Nonprofessionals
- Portfolio Income
- Portfolio Income and Passive Losses
- Interest on Accounts Receivable
- What are At-Risk Rules?
Copyright © 2008-2012 Larry Villano. All rights reserved.