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Need Some Deductions for 2011?
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Updated for 2011
Passive Activity Rules
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Portfolio Income
Portfolio income (or loss) is nonpassive and not derived in the ordinary course of business.
Examples of portfolio income include:
- Interest and dividends
- Annuities
- Gains or losses on the sale of properties that produce portfolio income
- Royalties from property held for investment
Portfolio Income and Passive Losses
You cannot deduct passive losses from portfolio income.
Investing in a business activity:
If you invest in a business but do not actively participate in its day-to-day operations, you are an investor in the business and not a participant in it.
Consequently, should the business suffer a loss, as an investor in the business, for you, the loss is classified as a passive loss.
The tax treatment of business losses for investors differs from the tax treatment of business losses for individuals who actively participate in the operations of the business.
- Investors may only deduct passive losses from passive income.
- Passive income is income derived from a business in which an investor has a financial interest but does not participate in its operations.
- Active participants in the operations of a business, on the other hand, may deduct business losses from their other sources of income, such as wages, interest, and dividends.
Portfolio income:
Portfolio income earned by the activity is excluded from the determination of passive income or loss.
Portfolio expenses:
In addition, expenses related to portfolio income are also excluded from the computation of passive income or loss.
Reminder: You cannot deduct passive losses from portfolio income.
Interest on Accounts Receivable
Interest received on business accounts receivable is not treated as portfolio income.
Report such interest as other income.
Other income is a separate line item on the profit and loss statement (also called income statement).
You add items included in other income to gross receipts derived from the primary activity of the business.
Next:
At-Risk Rules: What are At-Risk Rules?
Related Links
- Passive Activity and At-Risk Rules
- Who Do Passive Activity Rules Apply To
- Investors
- Purpose of Passive Activity Rules
- What is a Passive Activity?
- Tax Forms You May Need to File
- Material Participation
- Proof of Participation
- 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
Copyright © 2008-2012 Larry Villano. All rights reserved.
