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File free state and federal taxes Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. File free state and federal taxes Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. File free state and federal taxes For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. File free state and federal taxes Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. File free state and federal taxes See Passive Activity Deductions, later. File free state and federal taxes Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. File free state and federal taxes However, there is a special allowance under which some or all of your passive activity loss may be allowed. File free state and federal taxes See Special $25,000 allowance , later. File free state and federal taxes Definition of passive activity loss. File free state and federal taxes    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. File free state and federal taxes See Passive Activity Income and Deductions , later. File free state and federal taxes   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. File free state and federal taxes For details on net active income, see the Instructions for Form 8810. File free state and federal taxes For the definition of passive activity gross income, see Passive Activity Income , later. File free state and federal taxes For the definition of passive activity deductions, see Passive Activity Deductions , later. File free state and federal taxes Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. File free state and federal taxes Allocation of disallowed passive activity loss among activities. File free state and federal taxes   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. File free state and federal taxes The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. File free state and federal taxes Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. File free state and federal taxes Loss from an activity. File free state and federal taxes   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. File free state and federal taxes   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. File free state and federal taxes See Significant Participation Passive Activities , later. File free state and federal taxes Example. File free state and federal taxes John Pine holds interests in three passive activities, A, B, and C. File free state and federal taxes The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. File free state and federal taxes Therefore, a ratable portion of the losses from activities A and B is disallowed. File free state and federal taxes He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. File free state and federal taxes   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. File free state and federal taxes The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. File free state and federal taxes Excluded deductions. File free state and federal taxes    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. File free state and federal taxes See Recharacterization of Passive Income , later. File free state and federal taxes Separately identified deductions. File free state and federal taxes   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. File free state and federal taxes   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. File free state and federal taxes   Deductions that must be accounted for separately include (but are not limited to) the following deductions. File free state and federal taxes Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. File free state and federal taxes See Active participation , later. File free state and federal taxes Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. File free state and federal taxes See Active participation , later. File free state and federal taxes Losses from sales or exchanges of capital assets. File free state and federal taxes Section 1231 losses. File free state and federal taxes See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. File free state and federal taxes Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. File free state and federal taxes The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. File free state and federal taxes For more information, see Regulations section 1. File free state and federal taxes 469-1(f)(4). File free state and federal taxes Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. File free state and federal taxes The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. File free state and federal taxes Credits that are included in figuring the general business credit are subject to the passive activity rules. File free state and federal taxes See the Instructions for Form 8582-CR for more information. File free state and federal taxes Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). File free state and federal taxes You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. File free state and federal taxes You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. File free state and federal taxes Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. File free state and federal taxes This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. File free state and federal taxes For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. File free state and federal taxes Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. File free state and federal taxes These rules do not apply to C corporations. File free state and federal taxes For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. File free state and federal taxes Passive Activities There are two kinds of passive activities. File free state and federal taxes Trade or business activities in which you do not materially participate during the year. File free state and federal taxes Rental activities, even if you do materially participate in them, unless you are a real estate professional. File free state and federal taxes Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . File free state and federal taxes Treatment of former passive activities. File free state and federal taxes   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. File free state and federal taxes You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. File free state and federal taxes Treat any remaining prior year unallowed loss like you treat any other passive loss. File free state and federal taxes   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. File free state and federal taxes The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. File free state and federal taxes You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). File free state and federal taxes Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). File free state and federal taxes A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. File free state and federal taxes You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. File free state and federal taxes Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. File free state and federal taxes See Real Estate Professional under Activities That Are Not Passive Activities, later. File free state and federal taxes An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. File free state and federal taxes It does not matter whether the use is under a lease, a service contract, or some other arrangement. File free state and federal taxes Exceptions. File free state and federal taxes   Your activity is not a rental activity if any of the following apply. File free state and federal taxes The average period of customer use of the property is 7 days or less. File free state and federal taxes You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. File free state and federal taxes If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. File free state and federal taxes The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. File free state and federal taxes The activity's average period of customer use will equal the sum of the amounts for each class. File free state and federal taxes The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. File free state and federal taxes Significant personal services include only services performed by individuals. File free state and federal taxes To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. File free state and federal taxes Significant personal services do not include the following. File free state and federal taxes Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. File free state and federal taxes You provide extraordinary personal services in making the rental property available for customer use. File free state and federal taxes Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. File free state and federal taxes The rental is incidental to a nonrental activity. File free state and federal taxes The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. File free state and federal taxes The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. File free state and federal taxes The rental of property is incidental to a trade or business activity if all of the following apply. File free state and federal taxes You own an interest in the trade or business activity during the year. File free state and federal taxes The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. File free state and federal taxes Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. File free state and federal taxes Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. File free state and federal taxes You customarily make the rental property available during defined business hours for nonexclusive use by various customers. File free state and federal taxes You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. File free state and federal taxes    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. File free state and federal taxes Special $25,000 allowance. File free state and federal taxes   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. File free state and federal taxes This special allowance is an exception to the general rule disallowing the passive activity loss. File free state and federal taxes Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. File free state and federal taxes   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. File free state and federal taxes If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. File free state and federal taxes   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. File free state and federal taxes See Phaseout rule , later. File free state and federal taxes Example. File free state and federal taxes Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. File free state and federal taxes She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. File free state and federal taxes She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). File free state and federal taxes Commercial revitalization deduction (CRD). File free state and federal taxes   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. File free state and federal taxes Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. File free state and federal taxes You cannot claim a CRD for a building placed in service after December 31, 2009. File free state and federal taxes Active participation. File free state and federal taxes   Active participation is not the same as material participation (defined later). File free state and federal taxes Active participation is a less stringent standard than material participation. File free state and federal taxes For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. File free state and federal taxes Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. File free state and federal taxes   Only individuals can actively participate in rental real estate activities. File free state and federal taxes However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. File free state and federal taxes   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. File free state and federal taxes The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. File free state and federal taxes   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). File free state and federal taxes   Limited partners are not treated as actively participating in a partnership's rental real estate activities. File free state and federal taxes   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. File free state and federal taxes   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. File free state and federal taxes Example. File free state and federal taxes Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. File free state and federal taxes He advertised and rented the house to the current tenant himself. File free state and federal taxes He also collected the rents and did the repairs or hired someone to do them. File free state and federal taxes Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. File free state and federal taxes Phaseout rule. File free state and federal taxes   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). File free state and federal taxes If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. File free state and federal taxes    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. File free state and federal taxes Taxable social security and tier 1 railroad retirement benefits. File free state and federal taxes Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. File free state and federal taxes The exclusion from income of interest from qualified U. File free state and federal taxes S. File free state and federal taxes savings bonds used to pay qualified higher education expenses. File free state and federal taxes The exclusion from income of amounts received from an employer's adoption assistance program. File free state and federal taxes Passive activity income or loss included on Form 8582. File free state and federal taxes Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). File free state and federal taxes Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). File free state and federal taxes The deduction for the employer-equivalent portion of self-employment tax. File free state and federal taxes The deduction for domestic production activities. File free state and federal taxes The deduction allowed for interest on student loans. File free state and federal taxes The deduction for qualified tuition and related expenses. File free state and federal taxes Example. File free state and federal taxes During 2013, John was unmarried and was not a real estate professional. File free state and federal taxes For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. File free state and federal taxes His modified adjusted gross income is $120,000. File free state and federal taxes When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. File free state and federal taxes He must carry over the remaining $16,000 passive activity loss to 2014. File free state and federal taxes He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. File free state and federal taxes   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. File free state and federal taxes For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). File free state and federal taxes   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. File free state and federal taxes Ordering rules. File free state and federal taxes   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. File free state and federal taxes The portion of passive activity losses not attributable to the CRD. File free state and federal taxes The portion of passive activity losses attributable to the CRD. File free state and federal taxes The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. File free state and federal taxes The portion of passive activity credits attributable to the rehabilitation credit. File free state and federal taxes The portion of passive activity credits attributable to the low-income housing credit. File free state and federal taxes Activities That Are Not Passive Activities The following are not passive activities. File free state and federal taxes Trade or business activities in which you materially participated for the tax year. File free state and federal taxes A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). File free state and federal taxes It does not matter whether you materially participated in the activity for the tax year. File free state and federal taxes However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. File free state and federal taxes  See Temporary Regulations section 1. File free state and federal taxes 469-1T(e)(4)(ii). File free state and federal taxes The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. File free state and federal taxes An activity of trading personal property for the account of those who own interests in the activity. File free state and federal taxes See Temporary Regulations section 1. File free state and federal taxes 469-1T(e)(6). File free state and federal taxes Rental real estate activities in which you materially participated as a real estate professional. File free state and federal taxes See Real Estate Professional , later. File free state and federal taxes You should not enter income and losses from these activities on Form 8582. File free state and federal taxes Instead, enter them on the forms or schedules you would normally use. File free state and federal taxes Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. File free state and federal taxes Material participation tests. File free state and federal taxes    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. File free state and federal taxes You participated in the activity for more than 500 hours. File free state and federal taxes Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. File free state and federal taxes You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. File free state and federal taxes The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. File free state and federal taxes A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. File free state and federal taxes See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. File free state and federal taxes You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. File free state and federal taxes The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. File free state and federal taxes An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. File free state and federal taxes Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. File free state and federal taxes   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. File free state and federal taxes Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). File free state and federal taxes Participation. File free state and federal taxes   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. File free state and federal taxes Work not usually performed by owners. File free state and federal taxes   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. File free state and federal taxes The work is not work that is customarily done by the owner of that type of activity. File free state and federal taxes One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. File free state and federal taxes Participation as an investor. File free state and federal taxes   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. File free state and federal taxes Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. File free state and federal taxes Spouse's participation. File free state and federal taxes   Your participation in an activity includes your spouse's participation. File free state and federal taxes This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. File free state and federal taxes Proof of participation. File free state and federal taxes You can use any reasonable method to prove your participation in an activity for the year. File free state and federal taxes You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. File free state and federal taxes For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. File free state and federal taxes Limited partners. File free state and federal taxes   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. File free state and federal taxes However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. File free state and federal taxes   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). File free state and federal taxes Retired or disabled farmer and surviving spouse of a farmer. File free state and federal taxes   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. File free state and federal taxes Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. File free state and federal taxes Corporations. File free state and federal taxes   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. File free state and federal taxes   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. File free state and federal taxes See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. File free state and federal taxes Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. File free state and federal taxes However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. File free state and federal taxes For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. File free state and federal taxes See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. File free state and federal taxes If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). File free state and federal taxes If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. File free state and federal taxes Qualifications. File free state and federal taxes   You qualified as a real estate professional for the year if you met both of the following requirements. File free state and federal taxes More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. File free state and federal taxes You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. File free state and federal taxes   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. File free state and federal taxes You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. File free state and federal taxes   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. File free state and federal taxes However, you can count your spouse's participation in an activity in determining if you materially participated. File free state and federal taxes Real property trades or businesses. File free state and federal taxes   A real property trade or business is a trade or business that does any of the following with real property. File free state and federal taxes Develops or redevelops it. File free state and federal taxes Constructs or reconstructs it. File free state and federal taxes Acquires it. File free state and federal taxes Converts it. File free state and federal taxes Rents or leases it. File free state and federal taxes Operates or manages it. File free state and federal taxes Brokers it. File free state and federal taxes Closely held corporations. File free state and federal taxes   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. File free state and federal taxes Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. File free state and federal taxes Self-charged interest. File free state and federal taxes   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. File free state and federal taxes   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. File free state and federal taxes This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. File free state and federal taxes   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. File free state and federal taxes    Exception. File free state and federal taxes The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. File free state and federal taxes 469-7(g) to avoid the application of these rules. File free state and federal taxes For more details on the self-charged interest rules, see Regulations section 1. File free state and federal taxes 469-7. File free state and federal taxes Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. File free state and federal taxes Passive activity income does not include the following items. File free state and federal taxes Income from an activity that is not a passive activity. File free state and federal taxes These activities are discussed under Activities That Are Not Passive Activities , earlier. File free state and federal taxes Portfolio income. File free state and federal taxes This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. File free state and federal taxes It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. File free state and federal taxes The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. File free state and federal taxes For more information on self-charged interest, see Self-charged interest , earlier. File free state and federal taxes Personal service income. File free state and federal taxes This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. File free state and federal taxes Income from positive section 481 adjustments allocated to activities other than passive activities. File free state and federal taxes (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. File free state and federal taxes ) Income or gain from investments of working capital. File free state and federal taxes Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. File free state and federal taxes This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. File free state and federal taxes Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. File free state and federal taxes Any other income that must be treated as nonpassive income. File free state and federal taxes See Recharacterization of Passive Income , later. File free state and federal taxes Overall gain from any interest in a publicly traded partnership. File free state and federal taxes See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. File free state and federal taxes State, local, and foreign income tax refunds. File free state and federal taxes Income from a covenant not to compete. File free state and federal taxes Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. File free state and federal taxes Alaska Permanent Fund dividends. File free state and federal taxes Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. File free state and federal taxes See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. File free state and federal taxes Disposition of property interests. File free state and federal taxes   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. File free state and federal taxes The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. File free state and federal taxes An exception to this general rule may apply if you previously used the property in a different activity. File free state and federal taxes Exception for more than one use in the preceding 12 months. File free state and federal taxes   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. File free state and federal taxes Any gain allocated to a passive activity is passive activity income. File free state and federal taxes   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. File free state and federal taxes Exception for substantially appreciated property. File free state and federal taxes   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. File free state and federal taxes You used the property in a passive activity for 20% of the time you held your interest in the property. File free state and federal taxes You used the property in a passive activity for the entire 24-month period before its disposition. File free state and federal taxes If neither condition applies, the gain is not passive activity income. File free state and federal taxes However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. File free state and federal taxes   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. File free state and federal taxes Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. File free state and federal taxes   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. File free state and federal taxes Disposition of property converted to inventory. File free state and federal taxes   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. File free state and federal taxes Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. File free state and federal taxes This rule applies only if you meet all of the following conditions. File free state and federal taxes At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). File free state and federal taxes Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. File free state and federal taxes You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. File free state and federal taxes Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. File free state and federal taxes For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. File free state and federal taxes See Coordination with other limitations on deductions that apply before the passive activity rules , later. File free state and federal taxes Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. File free state and federal taxes Exceptions. File free state and federal taxes   Passive activity deductions do not include the following items. File free state and federal taxes Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. File free state and federal taxes Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. File free state and federal taxes For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. File free state and federal taxes Losses from dispositions of property that produce portfolio income or property held for investment. File free state and federal taxes State, local, and foreign income taxes. File free state and federal taxes Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. File free state and federal taxes Charitable contribution deductions. File free state and federal taxes Net operating loss deductions. File free state and federal taxes Percentage depletion carryovers for oil and gas wells. File free state and federal taxes Capital loss carrybacks and carryovers. File free state and federal taxes Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. File free state and federal taxes See Coordination with other limitations on deductions that apply before the passive activity rules , later. File free state and federal taxes Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. File free state and federal taxes Net negative section 481 adjustments allocated to activities other than passive activities. File free state and federal taxes (Section 481 adjustments are adjustments required due to changes in accounting methods. File free state and federal taxes ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. File free state and federal taxes The deduction for the employer-equivalent portion of self-employment tax. File free state and federal taxes Coordination with other limitations on deductions that apply before the passive activity rules. File free state and federal taxes   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. File free state and federal taxes The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. File free state and federal taxes Proration of deductions disallowed under basis limitations. File free state and federal taxes   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. File free state and federal taxes For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. File free state and federal taxes   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. File free state and federal taxes For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. File free state and federal taxes Proration of deductions disallowed under at-risk limitation. File free state and federal taxes   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. File free state and federal taxes For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. File free state and federal taxes Coordination of basis and at-risk limitations. File free state and federal taxes   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. File free state and federal taxes Separately identified items of deduction and loss. File free state and federal taxes   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. File free state and federal taxes   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. File free state and federal taxes See Grouping Your Activities , later. File free state and federal taxes Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). File free state and federal taxes See Section 1231 Gains and Losses in Publication 544 for more information. File free state and federal taxes Are attributable to pre-enactment interests in activities. File free state and federal taxes See Regulations section 1. File free state and federal taxes 469-11T(c). File free state and federal taxes Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. File free state and federal taxes Grouping is important for a number of reasons. File free state and federal taxes If you group two activities into one larger activity, you need only show material participation in the activity as a whole. File free state and federal taxes But if the two activities are separate, you must show material participation in each one. File free state and federal taxes On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. File free state and federal taxes But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. File free state and federal taxes Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. File free state and federal taxes Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. File free state and federal taxes You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. File free state and federal taxes The following factors have the greatest weight in determining whether activities form an appropriate economic unit. File free state and federal taxes All of the factors do not have to apply to treat more than one activity as a single activity. File free state and federal taxes The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. File free state and federal taxes Example 1. File free state and federal taxes John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. File free state and federal taxes Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. File free state and federal taxes For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. File free state and federal taxes Example 2. File free state and federal taxes Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. File free state and federal taxes Betty is also a partner in DEF (a trucking business). File free state and federal taxes ABC and DEF are under common control. File free state and federal taxes The main part of DEF's business is transporting goods for ABC. File free state and federal taxes DEF is the only trucking business in which Betty is involved. File free state and federal taxes Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. File free state and federal taxes Consistency and disclosure requirement. File free state and federal taxes   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. File free state and federal taxes You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. File free state and federal taxes   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. File free state and federal taxes   See Disclosure Requirement , later. File free state and federal taxes Regrouping by the IRS. File free state and federal taxes   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. File free state and federal taxes Rental activities. File free state and federal taxes   In general, you cannot group a rental activity with a trade or business activity. File free state and federal taxes However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. File free state and federal taxes Example. File free state and federal taxes Herbert and Wilma are married and file a joint return. File free state and federal taxes Healthy Food, an S corporation, is a grocery store business. File free state and federal taxes Herbert is Healthy Food's only shareholder. File free state and federal taxes Plum Tower, an S corporation, owns and rents out the building. File free state and federal taxes Wilma is Plum Tower's only shareholder. File free state and federal taxes Plum Tower rents part of its building to Healthy Food. File free state and federal taxes Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. File free state and federal taxes Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. File free state and federal taxes The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). File free state and federal taxes If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. File free state and federal taxes Grouping of real and personal property rentals. File free state and federal taxes   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. File free state and federal taxes However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. File free state and federal taxes Certain activities may not be grouped. File free state and federal taxes   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. File free state and federal taxes Holding, producing, or distributing motion picture films or video tapes. File free state and federal taxes Farming. File free state and federal taxes Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). File free state and federal taxes For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. File free state and federal taxes Exploring for, or exploiting, oil and gas resources. File free state and federal taxes Exploring for, or exploiting, geothermal deposits. File free state and federal taxes   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. File free state and federal taxes Limited entrepreneur. File free state and federal taxes   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. File free state and federal taxes Activities conducted through another entity. File free state and federal taxes   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. File free state and federal taxes Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. File free state and federal taxes    You may not treat activities grouped together by the entity as separate activities. File free state and federal taxes Personal service and closely held corporations. File free state and federal taxes   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. File free state and federal taxes See Material Participation , earlier, and Significant Participation Passive Activities , later. File free state and federal taxes Publicly traded partnership (PTP). File free state and federal taxes   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. File free state and federal taxes Partial dispositions. File free state and federal taxes   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. File free state and federal taxes However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. File free state and federal taxes Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. File free state and federal taxes You are required to report certain changes to your groupings that occur during the tax year to the IRS. File free state and federal taxes If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. File free state and federal taxes You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. File free state and federal taxes If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. File free state and federal taxes New grouping. File free state and federal taxes   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. File free state and federal taxes The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. File free state and federal taxes In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. File free state and federal taxes Addition to an existing grouping. File free state and federal taxes   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. File free state and federal taxes The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. File free state and federal taxes In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. File free state and federal taxes Regrouping. File free state and federal taxes   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. File free state and federal taxes The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. File free state and federal taxes If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. File free state and federal taxes In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. File free state and federal taxes Groupings by partnerships and S corporations. File free state and federal taxes   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. File free state and federal taxes Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. File free state and federal taxes S. File free state and federal taxes Return of Partnership Income, or Form 1120S, U. File free state and federal taxes S. File free state and federal taxes Income Tax Return for an S Corporation, whichever is applicable. File free state and federal taxes   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. File free state and federal taxes   A partner or shareholder may not treat activities grouped together by the entity as separate activities. File free state and federal taxes Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. File free state and federal taxes Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. File free state and federal taxes If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. File free state and federal taxes If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). File free state and federal taxes If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. File free state and federal taxes Instead, enter income or losses on the form and schedules you normally use. File free state and federal taxes However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. File free state and federal taxes Limit on recharacterized passive income. File free state and federal taxes   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. File free state and federal taxes Investment income and investment expense. File free state and federal taxes   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. File free state and federal taxes Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. File free state and federal taxes If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. File free state and federal taxes Corporations. File free state and federal taxes   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. File free state and federal taxes The corporation is not treated as materially participating in the activity for the year. File free state and federal taxes One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. File free state and federal taxes Worksheet A. File free state and federal taxes   Complete Worksheet A. File free state and federal taxes Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. File free state and federal taxes Begin by entering the name of each activity in the left column. File free state and federal taxes Column (a). File free state and federal taxes   Enter the number of hours you participated in each activity and total the column. File free state and federal taxes   If the total is more than 500, do not complete Worksheet A or B. File free state and federal taxes None of the activities are passive activities because you satisfy test 4 for material participation. File free state and federal taxes (See Material participation tests , earlier. File free state and federal taxes ) Report all the income and losses from these activities on the forms and schedules you normally use. File free state and federal taxes Do not include the income and losses on Form 8582. File free state and federal taxes Column (b). File free state and federal taxes   Enter the net loss, if any, from the activity. File free state and federal taxes Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). File free state and federal taxes Enter -0- here if the prior year unallowed loss is the same as the current year net income. File free state and federal taxes Column (c). File free state and federal taxes   Enter net income (if any) from the activity. File free state and federal taxes Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. File free state and federal taxes Column (d). File free state and federal taxes   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). File free state and federal taxes If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. File free state and federal taxes Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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Better Business Bureaus (BBBs) are nonprofit organizations that encourage honest advertising and selling practices and are supported primarily by local businesses. They offer a variety of consumer services, including consumer education materials; business reports, particularly unanswered or unsettled complaints or other problems; mediation and arbitration services; and information about charities and other organizations that are seeking public donations. They also provide ratings (A, B, C, D, or F) of local companies to express the BBB's confidence that the company operates in a trustworthy manner and demonstrates a willingness to resolve customer concerns.

Akron, OH

Website: Better Business Bureau

Email: info@akronbbb.org

Address: Better Business Bureau
222 W. Market St.
Akron, OH 44303

Phone Number: 330-253-4590

Canton, OH

Website: Better Business Bureau http://www.bbb.org/

Email: info@cantonbbb.org

Address: Better Business Bureau
1434 Cleveland Ave., NW
Canton, OH 44703

Phone Number: 330-454-9401

Toll-free: 1-800-362-0494

Cincinnati, OH

Website: Better Business Bureau

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Address: Better Business Bureau
7 W. 7th St., Suite 1600
Cincinnati, OH 45202

Phone Number: 513-421-3015

Cleveland, OH

Website: Better Business Bureau

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Address: Better Business Bureau
2800 Euclid Ave., 4th Floor
Cleveland, OH 44115

Phone Number: 216-241-7678

Toll-free: 1-800-233-0361

Columbus, OH

Website: Better Business Bureau

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Address: Better Business Bureau
1169 Dublin Rd.
Columbus, OH 43215-1005

Phone Number: 614-486-6336

Dayton, OH

Website: Better Business Bureau

Email: info@dayton.bbb.org

Address: Better Business Bureau
15 W. Fourth St., Suite 300
Dayton, OH 45402

Phone Number: 937-222-5825

Toll-free: 1-800-776-5301

Lima, OH

Website: Better Business Bureau

Email: info@limabbb.org

Address: Better Business Bureau
219 N. McDonel St.
Lima, OH 45801

Phone Number: 419-223-7010

Toledo, OH

Website: Better Business Bureau

Email: info@toledobbb.org

Address: Better Business Bureau
Integrity Pl.
7668 King's Pointe Rd.
Toledo, OH 43617

Phone Number: 419-531-3116

Toll-free: 1-800-743-4222

Youngstown, OH

Website: Better Business Bureau

Email: info@youngstown.bbb.org

Address: Better Business Bureau
PO Box 1495
Youngstown, OH 44501

Phone Number: 330-744-3111

The File Free State And Federal Taxes

File free state and federal taxes Publication 3402 - Introductory Material Table of Contents Reminder IntroductionOrdering forms and publications. File free state and federal taxes Tax questions. File free state and federal taxes Useful Items - You may want to see: Reminder Photographs of missing children. File free state and federal taxes  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. File free state and federal taxes Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. File free state and federal taxes You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. File free state and federal taxes Introduction This publication provides federal income, employment, and excise tax information for limited liability companies. File free state and federal taxes This publication does not address state law governing the formation, operation, or termination of limited liability companies. File free state and federal taxes This publication does not address any state taxes. File free state and federal taxes Comments and suggestions. File free state and federal taxes   We welcome your comments about this publication and your suggestions for future editions. File free state and federal taxes   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. File free state and federal taxes NW, IR–6526 Washington, DC 20224   We respond to many letters by telephone. File free state and federal taxes Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. File free state and federal taxes   You can email us at *taxforms@irs. File free state and federal taxes gov. File free state and federal taxes (The asterisk must be included in the address. File free state and federal taxes ) Please put “Publications Comment” on the subject line. File free state and federal taxes Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products. File free state and federal taxes Ordering forms and publications. File free state and federal taxes   Visit www. File free state and federal taxes irs. File free state and federal taxes gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received. File free state and federal taxes Internal Revenue Service1201 N. File free state and federal taxes Mitsubishi MotorwayBloomington, IL 61705-6613 Tax questions. File free state and federal taxes   If you have a tax question, check the information available on www. File free state and federal taxes irs. File free state and federal taxes gov or call 1-800-829-1040. File free state and federal taxes We cannot answer tax questions sent to either of the above addresses. File free state and federal taxes Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 505 Tax Withholding and Estimated Tax 535 Business Expenses 541 Partnerships 542 Corporations 544 Sales and Other Dispositions of Assets 583 Starting a Business and Keeping Records 925 Passive Activity and At-Risk Rules Form (and Instructions) 1065 U. File free state and federal taxes S. File free state and federal taxes Return of Partnership Income 1120 U. File free state and federal taxes S. File free state and federal taxes Corporation Income Tax Return 1120S U. File free state and federal taxes S. File free state and federal taxes Income Tax Return for an S Corporation 2553 Election by a Small Business Corporation 8832 Entity Classification Election See How To Get More Information near the end of this publication for information about getting publications and forms. File free state and federal taxes Prev  Up  Next   Home   More Online Publications