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            Publication 925
            Cat. No. 64265X                                                    Contents
                                                                               Future Developments           . . . . . . . . . . . . 1
Department 
of the      Passive Activity                                                   Introduction . . . . . . . . . . . . . . . . . . 2
Treasury
Internal                                                                       Passive Activity Limits         . . . . . . . . . . . 2
Revenue     and                                                                  Who Must Use These Rules? . . . . . . 2
Service                                                                          Passive Activities . . . . . . . . . . . . . 3
                                                                                 Activities That Aren’t Passive 
            At-Risk Rules                                                                  Activities. . . . . . . . . . . . . . . . 5
                                                                                 Passive Activity Income and 
                                                                                           Deductions    . . . . . . . . . . . . . . 6
                                                                                 Grouping Your Activities . . . . . . . . . 8
            For use in preparing                                                 Recharacterization of Passive 
                                                                                           Income    . . . . . . . . . . . . . . .   10
                                                                                 Dispositions . . . . . . . . . . . . . . .          12
            2022 Returns                                                         How To Report Your Passive 
                                                                                           Activity Loss   . . . . . . . . . . . .   12
                                                                               At-Risk Limits . . . . . . . . . . . . . . . .        13
                                                                                 Who Is Affected? . . . . . . . . . . . .            13
                                                                                 Activities Covered by the 
                                                                                           At-Risk Rules . . . . . . . . . . . .     13
                                                                                 At-Risk Amounts . . . . . . . . . . . .             14
                                                                                 Amounts Not at Risk . . . . . . . . . .             15
                                                                                 Reductions of Amounts at Risk . . . .               15
                                                                                 Recapture Rule . . . . . . . . . . . . .            15
                                                                               How To Get Tax Help           . . . . . . . . . . .   16
                                                                               Index       . . . . . . . . . . . . . . . . . . . . . 18

                                                                               Future Developments
                                                                               For the latest developments related to Pub. 
                                                                               925,  such  as  legislation  enacted  after  it  was 
                                                                               published, go to IRS.gov/Pub925.

                                                                               Reminders
                                                                               Excess business loss limitation.            If you are a 
                                                                               noncorporate  taxpayer  and  have  allowable 
                                                                               business  losses  after  taking  into  account  first 
                                                                               the at-risk limitations and then the passive loss 
                                                                               limitations  (Form  8582),  your  losses  may  be 
                                                                               subject  to  the  excess  business  loss  limitation. 
                                                                               After taking into account all the other loss limita-
                                                                               tions,  complete  Form  461,  Limitation  on  Busi-
                                                                               ness  Losses,  to  figure  the  amount  of  your  ex-
                                                                               cess  business  loss.  See  Form  461  and  its 
                                                                               instructions for details on the excess business 
                                                                               loss limitation.
                                                                               Commercial revitalization deduction (CRD). 
                                                                               The 120-month deduction period for rental real 
                                                                               estate placed in service by December 31, 2009, 
                                                                               has expired. See Form 8582 and its instructions 
                                                                               for reporting requirements for unused CRDs.
                                                                               Changes  in  rules  on  grouping  and  defini-
                                                                               tion of real property trade or business.            T.D. 
                                                                               9943  revised  certain  rules  in  the  Regulations 
                                                                               under section 469.
                                                                               • Applicable date. The new rules apply to 
              Get forms and other information faster and easier at:              tax years beginning on or after March 22, 
              • IRS.gov (English)         • IRS.gov/Korean (한국어)                 2021, but you may chose to adopt these 
              • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)            rules earlier. See Regulations section 
              • IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt)      1.469-11(a)(1) and (4) for additional infor-
                                                                                 mation on applicability dates and early 

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adoption. If you are a calendar year tax- Comments and suggestions. We welcome • Estates,
payer, the new provision applies to you in your comments about this publication and sug- • Trusts (other than grantor trusts),
calendar year 2022. gestions for future editions. • Personal service corporations, and
• Grouping rules. T.D. 9943 added Regula- You can send us comments through • Closely held corporations.
tions section 1.469-4(d)(6), which prohibits IRS.gov/FormComments. Or, you can write to
grouping of trading activities described in the Internal Revenue Service, Tax Forms and Even though the rules don’t apply to grantor
Temporary Regulations section Publications, 1111 Constitution Ave. NW, trusts, partnerships, and S corporations directly,
1.469-1T(e)(6) subject to section 163(d)(5) IR-6526, Washington, DC 20224. they do apply to the owners of these entities.
(A)(ii) involving a non-passive trade or Although we can’t respond individually to
business in which the taxpayer does not each comment received, we do appreciate your For information about personal service cor-
materially participate with any other activity feedback and will consider your comments and porations and closely held corporations, includ-
or activities including other trading activi- suggestions as we revise our tax forms, instruc- ing definitions and how the passive activity
ties. See Regulations section 1.469-4(d)(6) tions, and publications. Don’t send tax ques- rules apply to these corporations, see Form
for more details. tions, tax returns, or payments to the above ad- 8810 and its instructions.
• Definition of real property trade or dress. Before applying the passive activity
business. T.D. 9905 and 9943 expanded ! limits, you must first determine the
Regulations section 1.469-9(b)(2)(i) to de- Getting answers to your tax questions. CAUTION amount of the deductions disallowed
fine several terms used in determining If you have a tax question not answered by this under the basis or at-risk rules. See Passive Ac-
whether a trade or business is a real prop- publication or the How To Get Tax Help section tivity Deductions, later.
erty trade or business for purposes of sec- at the end of this publication, go to the IRS In-
tion 469(c)(7)(C). T.D. 9905 added Regu- teractive Tax Assistant page at IRS.gov/
lations sections 1.469-9(b)(2)(ii)(H) and (I) Help/ITA where you can find topics by using the
defining real property operations and real search feature or viewing the categories listed. Passive Activity Loss

property management. T.D. 9943 added Getting tax forms, instructions, and pub- Generally, the passive activity loss for the tax
Regulations sections 1.469-9(b)(2)(ii)(A) lications. Go to IRS.gov/Forms to download year isn’t allowed. However, there is a special
and (B) defining real property development current and prior-year forms, instructions, and allowance under which some or all of your pas-
and real property redevelopment. publications. sive activity loss may be allowed. See Special
Regrouping due to Net Investment Income $25,000 allowance, later.
Tax. You may be able to regroup your activities Ordering tax forms, instructions, and
if you’re subject to the Net Investment Income publications. Go to IRS.gov/OrderForms to Definition of passive activity loss. Gener-
Tax. See Regrouping Due to Net Investment In- order current forms, instructions, and publica- ally, your passive activity loss for the tax year is
come Tax under Grouping Your Activities, later, tions; call 800-829-3676 to order prior-year the excess of your passive activity deductions
for more information. forms and instructions. The IRS will process over your passive activity gross income. See
your order for forms and publications as soon Passive Activity Income and Deductions, later.
At-risk amounts. The following rules apply to as possible. Don’t resubmit requests you’ve al- For a closely held corporation, the passive
amounts borrowed after May 3, 2004. ready sent us. You can get forms and publica- activity loss is the excess of passive activity de-
• You must file Form 6198, At-Risk Limita- tions faster online. ductions over the sum of passive activity gross
tions, if you’re engaged in an activity inclu-
ded in (6) under Activities Covered by the income and net active income. For details on
At-Risk Rules and you have borrowed cer- Useful Items net active income, see the Instructions for Form
tain amounts described in Certain bor- You may want to see: 8810. For the definition of passive activity gross
rowed amounts excluded under At-Risk income, see Passive Activity Income, later. For
Amounts in this publication. Publication the definition of passive activity deductions, see
Passive Activity Deductions, later.
• You may be considered at risk for certain 527 527 Residential Rental Property
amounts described in Certain borrowed (Including Rental of Vacation Homes)
amounts excluded under At-Risk Amounts Identification of Disallowed
secured by real property used in the activ- 541 541 Partnerships Passive Activity Deductions
ity of holding real property (other than min-
eral property) that, if nonrecourse, would Form (and Instructions) If all or a part of your passive activity loss is dis-
be qualified nonrecourse financing. 4952 4952 Investment Interest Expense allowed for the tax year, you may need to allo-
Photographs of missing children. The Inter- Deduction cate the disallowed passive activity loss among
different passive activities and among different
National Center for Missing & Exploited
nal Revenue Service is a proud partner with the 6198 6198 At-Risk Limitations deductions within a passive activity.
Children® (NCMEC). Photographs of missing 8582 8582 Passive Activity Loss Limitations
Allocation of disallowed passive activity
children selected by the Center may appear in 8582-CR 8582-CR Passive Activity Credit loss among activities. If all or any part of your
this publication on pages that would otherwise
be blank. You can help bring these children Limitations passive activity loss is disallowed for the tax
home by looking at the photographs and calling 8810 8810 Corporate Passive Activity Loss and year, a ratable portion of the loss (if any) from
800-THE-LOST (800-843-5678) if you recog- Credit Limitations each of your passive activities is disallowed.
nize a child. The ratable portion of a loss from an activity is
8949 8949 Sales and Other Dispositions of computed by multiplying the passive activity
Capital Assets loss that’s disallowed for the tax year by the
Introduction fraction obtained by dividing:
See How To Get Tax Help at the end of this
This publication discusses two sets of rules that publication for information about getting these 1. The loss from the activity for the tax year;
may limit the amount of your deductible loss publications and forms. by
from a trade, business, rental, or other in-
come-producing activity. The first part of the 2. The sum of the losses for the tax year from
publication discusses the passive activity rules. all activities having losses for the tax year.
The second part discusses the at-risk rules. Passive Activity Limits
Use Part VII of Form 8582 to figure the ratable
However, when you figure your allowable los- portion of the loss from each activity that’s disal-
ses from any activity, you must apply the at-risk Who Must Use These Rules? lowed.
rules before the passive activity rules.
The passive activity rules apply to: Loss from an activity. The term “loss from
• Individuals, an activity” means:
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1. The amount by which the passive activity                Separately        identified deductions.      In           passive income from the same PTP. This sepa-
     deductions (defined later) from the activity          identifying  the  deductions  from  an  activity  that     rate  treatment  rule  also  applies  to  a  regulated 
     for the tax year exceed the passive activity          are disallowed, you don’t need to account sepa-            investment  company  holding  an  interest  in  a 
     gross income (defined later) from the ac-             rately  for  a  deduction  unless  such  deduction         PTP for the items attributable to that interest.
     tivity for the tax year; reduced by                   may, if separately taken into account, result in 
2. Any part of such amount that’s allowed un-              an income tax liability for any tax year different          For  more  information  on  how  to  apply  the 
     der the Special $25,000 allowance, later.             from that which would result were such deduc-              passive activity loss rules to PTPs, and on how 
                                                           tion not taken into account separately.                    to  apply  the  limit  on  passive  activity  credits  to 
If  your  passive  activity  gross  income  from           Use  Form  8582,  Part  IX,  for  any  activity  if        PTPs, see Publicly Traded Partnerships (PTPs) 
significant  participation  passive  activities  (de-      you have passive activity deductions for that ac-          in  the  instructions  for  Forms  8582  and 
fined  later)  for  the  tax  year  is  more  than  your   tivity that must be separately identified.                 8582-CR, respectively.
passive activity deductions from those activities          Deductions that must be accounted for sep-
for the tax year, those activities shall be treated,       arately include (but aren’t limited to) the follow-        Passive Activities
solely for purposes of figuring your loss from the         ing deductions.
activity, as a single activity that doesn’t have a         • Deductions that arise in a rental real estate            There are two kinds of passive activities.
loss for such taxable year. See Significant Par-             activity in tax years in which you actively                Trade or business activities in which you 
ticipation Passive Activities, later.                        participate in such activity. See Active par-            •
                                                             ticipation, later.                                         don’t materially participate during the year.
Example.       Terry  holds  interests  in  three          • Deductions that arise in a rental real estate            • Rental activities, even if you do materially 
passive  activities,  A,  B,  and  C.  The  gross  in-       activity in tax years in which you don’t ac-               participate in them, unless you’re a real es-
come  and  deductions  from  these  activities  for          tively participate in such activity. See Ac-               tate professional.
the taxable year are as follows.                             tive participation, later.                               Material  participation  in  a  trade  or  business  is 
                                                           • Losses from sales or exchanges of capital                discussed,  later,  under Activities  That  Aren’t 
                                                             assets.                                                  Passive Activities.
               A      B          C         Total           • Section 1231 losses. See Section 1231 
                                                             Gains and Losses in Pub. 544, Sales and                  Treatment  of  former  passive  activities.      A 
Gross                                                        Other Dispositions of Assets, for more in-               former passive activity is an activity that was a 
income       $7,000  $4,000    $12,000   $23,000             formation.                                               passive activity in any earlier tax year, but isn’t a 
                                                                                                                      passive activity in the current tax year. You can 
Deductions (16,000) (20,000)   (8,000)   (44,000)                                                                     deduct a prior-year unallowed loss from the ac-
                                                           Carryover of Disallowed                                    tivity up to the amount of your current-year net 
                                                           Deductions
Net                                                                                                                   income  from  the  activity.  Treat  any  remaining 
income                                                     In the case of an activity with respect to which           prior-year  unallowed  loss  like  you  treat  any 
(loss)     ($9,000) ($16,000)  $4,000    ($21,000)         any  deductions  or  credits  are  disallowed  for  a      other passive loss.
                                                           taxable  year  (the  loss  activity),  the  disallowed      In  addition,  any  prior-year  unallowed  pas-
Terry’s $21,000 passive activity loss for the              deductions are allocated among your activities             sive activity credits from a former passive activ-
taxable year is disallowed. Therefore, a ratable           for the next tax year in a manner that reasona-            ity offset the allocable part of your current-year 
portion of the losses from activities A and B is           bly  reflects  the  extent  to  which  each  activity      tax  liability.  The  allocable  part  of  your  cur-
disallowed. The disallowed portion of each loss            continues  the  loss  activity.  The  disallowed  de-      rent-year tax liability is that part of this year's tax 
is as follows.                                             ductions or credits allocated to an activity under         liability  that‘s  allocable  to  the  current-year  net 
                                                           the  preceding  sentence  are  treated  as  deduc-         income  from  the  former  passive  activity.  You 
A: $21,000 x $9,000/$25,000           $7,560               tions or credits from the activity for the next tax        figure  this  after  you  reduce  your  net  income 
B: $21,000 x $16,000/$25,000          13,440               year.  For  more  information,  see  Regulations           from  the  activity  by  any  prior-year  unallowed 
                                                           section 1.469-1(f)(4).                                     loss from that activity (but not below zero).
           Total                      $21,000
                                                                                                                      Trade or Business Activities
                                                           Passive Activity Credit
Allocation within loss activities.    If all or any                                                                   A trade or business activity is an activity that:
part  of  your  loss  from  an  activity  is  disallowed   Generally, the passive activity credit for the tax 
under  Allocation  of  disallowed  passive  activity       year is disallowed.                                        • Involves the conduct of a trade or business 
                                                                                                                        (that is, deductions would be allowable un-
loss among activities for the tax year, a ratable          The passive activity credit is the amount by                 der section 162 of the Internal Revenue 
portion of each of your passive activity deduc-            which the sum of all your credits subject to the             Code if other limitations, such as the pas-
tions (defined later), other than an excluded de-          passive activity rules exceed your regular tax li-           sive activity rules, didn’t apply);
duction  (defined  below)  from  such  activity  is        ability  allocable  to  all  passive  activities  for  the • Is conducted in anticipation of starting a 
disallowed. The ratable portion of a passive ac-           tax year. Credits that are included in figuring the          trade or business; or
tivity deduction is the amount of the disallowed           general business credit are subject to the pas-            • Involves research or experimental expen-
portion  of  the  loss  from  the  activity  for  the  tax sive activity rules.                                         ditures that are deductible under Internal 
year multiplied by the fraction obtained by divid-                                                                      Revenue Code section 174 (or that would 
ing:                                                       See  the  Instructions  for  Form  8582-CR  for 
                                                           more information.                                            be deductible if you chose to deduct rather 
1. The amount of such deduction; by                                                                                     than capitalize them).
2. The sum of all of your passive activity de-             Publicly Traded Partnership                                A  trade  or  business  activity  doesn’t  include  a 
     ductions (other than excluded deductions)                                                                        rental activity or the rental of property that’s inci-
     from that activity from the tax year.                 You must apply the rules in this part separately           dental to an activity of holding the property for 
                                                           to  your  income  or  loss  from  a  passive  activity     investment.
Excluded  deductions.        “Excluded  deduc-             held  through  a  publicly  traded  partnership 
tion”  means  any  passive  activity  deduction            (PTP). You must also apply the limit on passive             You generally report trade or business activ-
that’s taken into account in computing your net            activity credits separately to your credits from a         ities  on  Schedule  C,  F,  or  in  Part  II  or  III  of 
income  from  an  item  of  property  for  a  taxable      passive activity held through a PTP.                       Schedule E.
year in which an amount of the taxpayer's gross 
income from such item of property is treated as            You can offset deductions from passive ac-
not from a passive activity. See Recharacteriza-           tivities  of  a  PTP  only  against  income  or  gain      Rental Activities
tion of Passive Income, later.                             from  passive  activities  of  the  same  PTP.  Like-
                                                           wise, you can offset credits from passive activi-          A rental activity is a passive activity even if you 
                                                           ties  of  a  PTP  only  against  the  tax  on  the  net    materially  participated  in  that  activity,  unless 
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you materially participated as a real estate pro- property is its cost not reduced by depreci- $11,000 rental real estate loss to offset $11,000
fessional. See Real Estate Professional under ation or any other basis adjustment. The of your nonpassive income (wages).
Activities That Aren’t Passive Activities, later. rental of property is incidental to a trade or
An activity is a rental activity if tangible property business activity if all of the following ap- Active participation. Active participation
(real or personal) is used by customers or held ply. isn’t the same as material participation (defined
later). Active participation is a less stringent
for use by customers, and the gross income (or a. You own an interest in the trade or standard than material participation. For exam-
expected gross income) from the activity repre- business activity during the year. ple, you may be treated as actively participating
sents amounts paid (or to be paid) mainly for
the use of the property. It doesn’t matter b. The rental property was used mainly if you make management decisions in a signifi-
whether the use is under a lease, a service con- in that trade or business activity dur- cant and bona fide sense. Management deci-
tract, or some other arrangement. ing the current year, or during at least sions that count as active participation include
2 of the 5 preceding tax years. approving new tenants, deciding on rental
Exceptions. Your activity isn’t a rental activity terms, approving expenditures, and similar de-
if any of the following apply. c. Your gross rental income from the cisions.
property is less than 2% of the smaller Only individuals can actively participate in
1. The average period of customer use of the of its unadjusted basis or fair market rental real estate activities. However, a dece-
property is 7 days or less. You figure the value. Lodging provided to an em- dent's estate is treated as actively participating
average period of customer use by divid- ployee or the employee's spouse or for its tax years ending less than 2 years after
ing the total number of days in all rental dependents is incidental to the activity the decedent's death, if the decedent would
periods by the number of rentals during or activities in which the employee have satisfied the active participation require-
the tax year. If the activity involves renting performs services if the lodging is fur- ment for the activity for the tax year the dece-
more than one class of property, multiply nished for the employer's conven- dent died.
the average period of customer use of ience. A decedent's qualified revocable trust can
each class by a fraction. The numerator of also be treated as actively participating if both
the fraction is the gross rental income from 5. You customarily make the rental property
that class of property and the denominator available during defined business hours the trustee and the executor (if any) of the es-
is the activity's total gross rental income. for nonexclusive use by various custom- tate choose to treat the trust as part of the es-
The activity's average period of customer ers. tate. The choice applies to tax years ending af-
ter the decedent's death and before:
use will equal the sum of the amounts for 6. You provide the property for use in a non- • 2 years after the decedent's death if no es-
each class. rental activity in your capacity as an owner tate tax return is required, or
2. The average period of customer use of the of an interest in the partnership, S corpo- • 6 months after the estate tax liability is fi-
property, as figured in (1) above, is 30 ration, or joint venture conducting that ac- nally determined if an estate tax return is
days or less and you provide significant tivity. required.
personal services with the rentals. Signifi- If you meet any of the exceptions listed The choice is irrevocable and can’t be made
cant personal services include only serv- TIP above, see the Instructions for Form later than the due date for the estate's first in-
ices performed by individuals. To deter- 8582 for information about how to re- come tax return (including any extensions).
mine if personal services are significant, port any income or loss from the activity. Except as provided in regulations, limited
all relevant facts and circumstances are partners aren’t treated as actively participating
taken into consideration, including the fre- in a partnership's rental real estate activities.
quency of the services, the type and Special $25,000 allowance. If you or your
amount of labor required to perform the spouse actively participated in a passive rental You aren’t treated as actively participating in
services, and the value of the services rel- real estate activity, the amount of the passive a rental real estate activity unless your interest
ative to the amount charged for use of the activity loss that’s disallowed is decreased and in the activity (including your spouse's interest)
property. Significant personal services you therefore can deduct up to $25,000 of loss was at least 10% (by value) of all interests in the
don’t include the following. from the activity from your nonpassive income. activity throughout the year.
This special allowance is an exception to the Active participation isn’t required to take the
a. Services needed to permit the lawful general rule disallowing the passive activity low-income housing credit or the rehabilitation
use of the property; loss. Similarly, you can offset credits from the investment credit from rental real estate activi-
b. Services to repair or improve property activity against the tax on up to $25,000 of non- ties.
that would extend its useful life for a passive income after taking into account any Example. Stacey, a single taxpayer, had
period substantially longer than the losses allowed under this exception. the following income and loss during the tax
average rental; and If you’re married, filing a separate return, year.
and lived apart from your spouse for the entire
c. Services that are similar to those tax year, your special allowance can’t be more . . . . . . . . . . . . . . . . . . . . . . . . . $42,300
commonly provided with long-term than $12,500. If you lived with your spouse at Salary
Dividends . . . . . . . . . . . . . . . . . . . . . . . 300
rentals of real estate, such as clean- any time during the year and are filing a sepa- Interest . . . . . . . . . . . . . . . . . . . . . . . . . 1,400
ing and maintenance of common rate return, you can’t use the special allowance Rental loss . . . . . . . . . . . . . . . . . . . . . . (4,000)
areas or routine repairs. to reduce your nonpassive income or tax on
3. You provide extraordinary personal serv- nonpassive income. The rental loss came from a house Stacey
ices in making the rental property available The maximum special allowance is reduced owned. Stacey advertised and rented the house
for customer use. Services are extraordi- if your modified adjusted gross income exceeds to the current tenant. Stacey also collected the
nary personal services if they’re performed certain amounts. See Phaseout rule, later. rents and did the repairs or hired someone to
by individuals and the customers' use of do them.
the property is incidental to their receipt of Example. You are a single taxpayer. You Even though the rental loss is a loss from a
the services. have $70,000 in wages, $15,000 income from a passive activity, Stacey can use the entire
limited partnership, a $26,000 loss from rental $4,000 loss to offset other income because Sta-
4. The rental is incidental to a nonrental ac- real estate activities in which you actively par- cey actively participated.
tivity. The rental of property is incidental to ticipated, and you aren’t subject to the modified
an activity of holding property for invest- adjusted gross income phaseout rule. You can Phaseout rule. The maximum special al-
ment if the main purpose of holding the use $15,000 of your $26,000 loss to offset your lowance of $25,000 ($12,500 for married indi-
property is to realize a gain from its appre- $15,000 passive income from the partnership. viduals filing separate returns and living apart at
ciation and the gross rental income from You actively participated in your rental real es- all times during the year) is reduced by 50% of
the property is less than 2% of the smaller tate activities, so you can use the remaining the amount of your modified adjusted gross in-
of the property's unadjusted basis or fair come that’s more than $100,000 ($50,000 if
market value. The unadjusted basis of you’re married filing separately). If your
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modified adjusted gross income is $150,000 or Exceptions to the phaseout rules. A Material Participation
more ($75,000 or more if you’re married filing higher phaseout range applies to rehabilitation
separately), you generally can’t use the special investment credits from rental real estate activi- A trade or business activity isn’t a passive activ-
allowance. This is because the special allow- ties. For those credits, the phaseout of the ity if you materially participated in the activity.
ance is reduced to $0 since the modified adjus- $25,000 special allowance starts when your
ted gross income is over the $100,000 amount. modified adjusted gross income exceeds Material participation tests. You materially
Modified adjusted gross income for this pur- $200,000 ($100,000 if you’re a married individ- participated in a trade or business activity for a
pose is your adjusted gross income figured ual filing a separate return and living apart at all tax year if you satisfy any of the following tests.
without the following. times during the year).
• Taxable social security and Tier 1 railroad There is no phaseout of the $25,000 special 1. You participated in the activity for more
retirement benefits. allowance for low-income housing credits. than 500 hours.
• Deductible contributions to individual re- 2. Your participation was substantially all the
tirement accounts (IRAs) and section Ordering rules. If you have more than one
501(c)(18) pension plans. of the exceptions to the phaseout rules in the participation in the activity of all individuals
• The exclusion from income of interest from same tax year, you must apply the $25,000 for the tax year, including the participation
qualified U.S. savings bonds used to pay phaseout against your passive activity losses of individuals who didn’t own any interest
qualified higher education expenses. and credits in the following order. in the activity.
• The exclusion from income of amounts re- 1. Passive activity losses. 3. You participated in the activity for more
ceived from an employer's adoption assis- than 100 hours during the tax year, and
tance program. 2. The portion of passive activity credits at- you participated at least as much as any
• Passive activity income or loss included on tributable to credits other than the rehabili- other individual (including individuals who
Form 8582. tation and low-income housing credits. didn’t own any interest in the activity) for
• Any rental real estate loss allowed be- 3. The portion of passive activity credits at- the year.
cause you materially participated in the tributable to the rehabilitation credit. 4. The activity is a significant participation
rental activity as a Real Estate Professio- activity, and you participated in all signifi-
nal (as discussed, later, under Activities 4. The portion of passive activity credits at-
That Aren’t Passive Activities). tributable to the low-income housing cant participation activities for more than
• Any overall loss from a publicly traded credit. 500 hours. A significant participation activ-
ity is any trade or business activity in
partnership (see Publicly Traded Partner- which you participated for more than 100
ships (PTPs) in the instructions for Form Activities That Aren’t hours during the year and in which you
8582). Passive Activities didn’t materially participate under any of
• The deduction allowed for the deductible the material participation tests, other than
part of self-employment tax. this test. See Significant Participation Pas-
• Foreign-derived intangible income and The following aren’t passive activities.
sive Activities under Recharacterization of
global intangible low-taxed income. 1. Trade or business activities in which you Passive Income, later.
• The deduction allowed for interest on stu- materially participated for the tax year.
dent loans. 5. You materially participated in the activity
2. A working interest in an oil or gas well that (other than by meeting this fifth test) for
Example. During 2022, you were unmar- you hold directly or through an entity that any 5 (whether or not consecutive) of the
ried and weren’t a real estate professional. For doesn’t limit your liability (such as a gen- 10 immediately preceding tax years.
2022, you had $120,000 in salary and a eral partner interest in a partnership). It
$31,000 loss from your rental real estate activi- doesn’t matter whether you materially par- 6. The activity is a personal service activity in
ties in which you actively participated. Your ticipated in the activity for the tax year. which you materially participated for any 3
modified adjusted gross income is $120,000. However, if your liability was limited for (whether or not consecutive) preceding
When you file your 2022 return, you can deduct part of the year (for example, you conver- tax years. An activity is a personal service
only $15,000 of your passive activity loss. You ted your general partner interest to a limi- activity if it involves the performance of
must carry over the remaining $16,000 passive ted partner interest during the year) and personal services in the fields of health (in-
activity loss to 2023. You figure your deduction you had a net loss from the well for the cluding veterinary services), law, engi-
and carryover as follows. year, some of your income and deductions neering, architecture, accounting, actuarial
from the working interest may be treated science, performing arts, consulting, or
Adjusted gross income, modified as as passive activity gross income and pas- any other trade or business in which capi-
required . . . . . . . . . . . . . . . . . . . . . . . . $120,000 sive activity deductions. See Temporary tal isn’t a material income-producing fac-
Regulations section 1.469-1T(e)(4)(ii). tor.
Minus amount not subject to phaseout . . . . –100,000 3. The rental of a dwelling unit that you also 7. Based on all the facts and circumstances,
used for personal purposes during the you participated in the activity on a regu-
Amount subject to phaseout rule . . . . . . . . $20,000 year for more than the greater of 14 days lar, continuous, and substantial basis dur-
Multiply by 50% . . . . . . . . . . . . . . . . . . . × 50% ing the year.
or 10% of the number of days during the
Required reduction to special year that the home was rented at a fair You didn’t materially participate in the activ-
allowance . . . . . . . . . . . . . . . . . . . . . . . . $10,000 rental. ity under test (7) if you participated in the activ-
4. An activity of trading personal property for ity for 100 hours or less during the year. Your
Maximum special allowance . . . . . . . . . . . $25,000 the account of those who own interests in participation in managing the activity doesn’t
Minus required reduction (see above) . . . . –10,000 the activity. See Temporary Regulations count in determining whether you materially
section 1.469-1T(e)(6). participated under this test if:
• Any person other than you received com-
Adjusted special allowance . . . . . . . . . . . . $15,000 5. Rental real estate activities in which you pensation for managing the activity, or
materially participated as a real estate pro- • Any individual spent more hours during the
Passive loss from rental real estate . . . . . . $31,000 fessional. See Real Estate Professional, tax year managing the activity than you did
later. (regardless of whether the individual was
Deduction allowable/Adjusted compensated for the management serv-
special allowance (see above) . . . . . . . . . –15,000 You shouldn’t enter income and losses
from these activities on Form 8582, as ices).
Amount that must be carried forward . . . . . $16,000 CAUTION! they are not passive activities. Instead,
enter them on the forms or schedules you Participation. In general, any work you do in
would normally use. connection with an activity in which you own an
interest is treated as participation in the activity.
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Work not usually performed by owners. more shareholders holding more than 50% by Real property development. Real prop-
You don’t treat the work you do in connection value of the outstanding stock of the corpora- erty development is a trade or business that in-
with an activity as participation in the activity if tion materially participate in the activity. cludes the maintenance and improvement of
both of the following are true. A closely held corporation can also satisfy raw land to make it suitable for subdivision, fur-
• The work isn’t work that’s customarily done the material participation standard by meeting ther development, or construction of residential
by the owner of that type of activity. the first two requirements for the qualifying busi- or commercial buildings. Also included in real
• One of your main reasons for doing the ness exception from the at-risk limits. See Spe- property development is the establishment, cul-
work is to avoid the disallowance of any cial exception for qualified corporations under tivation, maintenance, or improvement of tim-
loss or credit from the activity under the Activities Covered by the At-Risk Rules, later. berlands.
passive activity rules.
Real property redevelopment. Real prop-
Participation as an investor. You don’t Real Estate Professional erty redevelopment is a trade or business that
treat the work you do in your capacity as an in- includes demolition, deconstruction, separation,
vestor in an activity as participation unless Generally, rental activities are passive activities and removal of existing buildings, landscaping,
you’re directly involved in the day-to-day man- even if you materially participated in them. and infrastructure on a parcel of land to return
agement or operations of the activity. Work you However, if you qualified as a real estate pro- the land to a raw condition or otherwise prepare
do as an investor includes: fessional, rental real estate activities in which the land for new development or construction,
• Studying and reviewing financial state- you materially participated aren’t passive activi- or for establishment, cultivation, maintenance,
ments or reports on operations of the activ- ties. For this purpose, each interest you have in or improvement of timberlands.
ity, a rental real estate activity is a separate activity,
• Preparing or compiling summaries or anal- unless you choose to treat all interests in rental Real property operations. Real property
yses of the finances or operations of the real estate activities as one activity. See the In- operations involve handling the day-to-day op-
activity for your own use, and structions for Schedule E (Form 1040), Supple- erations of a trade or business relating to the
• Monitoring the finances or operations of mental Income and Loss, for information about maintenance and occupancy of the real prop-
the activity in a nonmanagerial capacity. making this choice. erty affecting its availability or functionality by a
direct or indirect owner. The real property must
be used, or held for use, by customers and pay-
Spouse's participation. Your participation in If you qualified as a real estate professional ments received must be principally for the cus-
an activity includes your spouse's participation. for 2022, report income or losses from rental tomer's use of the property and not for the pro-
This applies even if your spouse didn’t own any real estate activities in which you materially par- vision of other significant or extraordinary
interest in the activity and you and your spouse ticipated as nonpassive income or losses, and personal services.
don’t file a joint return for the year. complete line 43 of Schedule E (Form 1040). If
Proof of participation. You can use you also have an unallowed loss from these ac- Real property management. Real prop-
any reasonable method to prove your tivities from an earlier year when you didn’t erty management involves handling the
RECORDS participation in an activity for the year. qualify, see Treatment of former passive activi- day-to-day operations of a trade or business re-
You don’t have to keep contemporaneous daily ties under Passive Activities, earlier. lating to the maintenance and occupancy of the
time reports, logs, or similar documents if you real property affecting its availability or function-
can establish your participation in some other Qualifications. You qualified as a real estate ality by a professional manager. The real prop-
way. For example, you can show the services professional for the year if you met both of the erty must be used, or held for use, by custom-
you performed and the approximate number of following requirements. ers and payments received must be principally
hours spent by using an appointment book, cal- • More than half of the personal services you for the customer's use of the property and not
endar, or narrative summary. performed in all trades or businesses dur- for the provision of other significant or extraordi-
ing the tax year were performed in real nary personal services. A professional manager
property trades or businesses in which you is a person who is not a direct or indirect owner
Limited partners. If you owned an activity as a materially participated. of the real property or properties and who is re-
limited partner, you generally aren’t treated as • You performed more than 750 hours of sponsible for, on a full-time basis, management
materially participating in the activity. However, services during the tax year in real property and oversight of the real property or properties.
you’re treated as materially participating in the trades or businesses in which you materi-
activity if you met test (1), (5), or (6) under Ma- ally participated. Closely held corporations. A closely held
terial participation tests, discussed earlier, for corporation can qualify as a real estate profes-
the tax year. Don’t count personal services you per- sional if more than 50% of the gross receipts for
You aren’t treated as a limited partner, how- formed as an employee in real property trades its tax year came from real property trades or
ever, if you were also a general partner in the or businesses unless you were a 5% owner of businesses in which it materially participated.
partnership at all times during the partnership's your employer. You were a 5% owner if you
tax year ending with or within your tax year (or, owned (or are considered to have owned) more
if shorter, during that part of the partnership's than 5% of your employer's outstanding stock, Passive Activity Income
tax year in which you directly or indirectly outstanding voting stock, or capital or profits in- and Deductions
owned your limited partner interest). terest.
If you file a joint return, don’t count your In figuring your net income or loss from a pas-
Retired or disabled farmer and surviving spouse's personal services to determine sive activity, take into account only passive ac-
spouse of a farmer. If you’re a retired or disa- whether you met the preceding requirements. tivity income and passive activity deductions.
bled farmer, you’re treated as materially partici- However, you can count your spouse's partici-
pating in a farming activity if you materially par- pation in an activity in determining if you materi- Self-charged interest. Certain self-charged
ticipated for 5 or more of the 8 years before ally participated. interest income or deductions may be treated
your retirement or disability. Similarly, if you’re a as passive activity gross income or passive ac-
surviving spouse of a farmer, you’re treated as Real property trades or businesses. A tivity deductions if the loan proceeds are used
materially participating in a farming activity if the real property trade or business is a trade or in a passive activity.
real property used in the activity meets the es- business that does any of the following with real Generally, self-charged interest income and
tate tax rules for special valuation of farm prop- property. deductions result from loans between you and a
erty passed from a qualifying decedent, and • Develops or redevelops it. partnership or S corporation in which you had a
you actively manage the farm. • Constructs or reconstructs it. direct or indirect ownership interest. This in-
• Acquires it. cludes both loans you made to the partnership
Corporations. A closely held corporation or a • Converts it. or S corporation and loans the partnership or S
personal service corporation is treated as mate- • Rents or leases it. corporation made to you.
rially participating in an activity only if one or • Operates or manages it. It also includes loans from one partnership
• Brokers it. or S corporation to another partnership or S
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corporation if each owner in the borrowing en- • State, local, and foreign income tax re- If you used the property in more than one
tity has the same proportional ownership inter- funds. activity during the 12-month period before its
est in the lending entity. • Income from a covenant not to compete. disposition, this exception applies only to the
Exception. The self-charged interest rules • Reimbursement of a casualty or theft loss part of the gain allocated to a passive activity
don’t apply to your interest in a partnership or S included in gross income to recover all or under the rules described in the preceding dis-
corporation if the entity made an election under part of a prior-year loss deduction, if the cussion.
Regulations section 1.469-7(g) to avoid the ap- loss deduction wasn’t a passive activity de-
plication of these rules. For more details on the duction. Disposition of property converted to inven-
self-charged interest rules, see Regulations • Alaska Permanent Fund dividends. tory. If you disposed of property that you had
section 1.469-7. • Cancellation of debt income, if at the time converted to inventory from its use in another
the debt is discharged the debt isn’t alloca- activity (for example, you sold condominium
Passive Activity Income ted to passive activities under the interest units you previously held for use in a rental ac-
expense allocation rules. See chapter 4 of tivity), a special rule may apply. Under this rule,
Pub. 535, Business Expenses, for informa- you disregard the property's use as inventory
Passive activity income includes all income tion about the rules for allocating interest. and treat it as if it were still used in that other ac-
from passive activities and generally includes tivity at the time of disposition. This rule applies
gain from disposition of an interest in a passive Disposition of property interests. Gain on only if you meet all of the following conditions.
activity or property used in a passive activity. the disposition of an interest in property is gen- • At the time of disposition, you held your in-
erally passive activity income if, at the time of terest in the property in a dealing activity
Passive activity income doesn’t include the the disposition, the property was used in an ac- (an activity that involves holding the prop-
following items. tivity that was a passive activity in the year of erty or similar property mainly for sale to
• Income from an activity that isn’t a passive disposition. The gain generally isn’t passive ac- customers in the ordinary course of a trade
activity. These activities are discussed un- tivity income if, at the time of disposition, the or business).
der Activities That Aren’t Passive Activi- property was used in an activity that wasn’t a • Your other activities included a nondealing
ties, earlier. passive activity in the year of disposition. An ex- activity (an activity that doesn’t involve
• Portfolio income. This includes interest, ception to this general rule may apply if you pre- holding similar property for sale to custom-
dividends, annuities, and royalties not de- viously used the property in a different activity. ers in the ordinary course of a trade or
rived in the ordinary course of a trade or business) in which you used the property
business. It includes gain or loss from the Exception for more than one use in the for more than 80% of the period you held it.
disposition of property that produces these preceding 12 months. If you used the prop- • You didn’t acquire or hold your interest in
types of income or that’s held for invest- erty in more than one activity during the the property for the main purpose of selling
ment. The exclusion for portfolio income 12-month period before its disposition, you it to customers in the ordinary course of a
doesn’t apply to self-charged interest trea- must allocate the gain between the activities on trade or business.
ted as passive activity income. For more a basis that reasonably reflects the property's
information on self-charged interest, see use during that period. Any gain allocated to a
Self-charged interest, earlier. passive activity is passive activity income. Passive Activity Deductions
• Personal service income. This includes For this purpose, an allocation of the gain
salaries, wages, commissions, self-em- solely to the activity in which the property was Generally, a deduction is a passive activity de-
ployment income from trade or business mainly used during that period reasonably re- duction for a taxable year if and only if such de-
activities in which you materially participa- flects the property's use if the fair market value duction either:
ted, deferred compensation, taxable social of your interest in the property isn’t more than 1. Arises in connection with the conduct of
security and other retirement benefits, and the lesser of: an activity that’s a passive activity for the
payments from partnerships to partners for • $10,000, or tax year, or
personal services. • 10% of the total of the fair market value of
• Income from positive section 481 adjust- your interest in the property and the fair 2. Is treated as a deduction from an activity
ments allocated to activities other than market value of all other property used in for the tax year because it was disallowed
passive activities. (Section 481 adjust- that activity immediately before the dispo- by the passive activity rules in the preced-
ments are adjustments that must be made sition. ing year and carried forward to the tax
year.
due to changes in your accounting Exception for substantially appreciated
method.) property. The gain is passive activity income if
• Income or gain from investments of work- the fair market value of the property at disposi- For purposes of item (1) above, an item of
ing capital. tion was more than 120% of its adjusted basis deduction arises in the taxable year in which the
• Income from an oil or gas property if you and either of the following conditions applies. item would be allowable as a deduction under
treated any loss from a working interest in • You used the property in a passive activity the taxpayer's method of accounting if taxable
the property for any tax year beginning af- for 20% of the time you held your interest income for all taxable years were determined
ter 1986 as a nonpassive loss, as dis- in the property. without regard to the passive activity rules and
cussed in item (2) under Activities That • You used the property in a passive activity without regard to the basis and at-risk limits.
Aren’t Passive Activities, earlier. This also for the entire 24-month period before its See Coordination with other limitations on de-
applies to income from other oil and gas disposition. ductions that apply before the passive activity
property, the basis of which is determined rules, later.
wholly or partly by the basis of the property If neither condition applies, the gain isn’t pas-
in the preceding sentence. sive activity income. However, it’s treated as Passive activity deductions generally in-
• Any income from intangible property, such portfolio income only if you held the property for clude any loss from a disposition of property
as a patent, copyright, or literary, musical, investment for more than half of the time you used in a passive activity at the time of the dis-
or artistic composition, if your personal ef- held it in nonpassive activities. position and any loss from a disposition of less
forts significantly contributed to the crea- For this purpose, treat property you held than your entire interest in a passive activity.
tion of the property. through a corporation (other than an S corpora-
• Any other income that must be treated as tion) or other entity whose owners receive only Exceptions. Passive activity deductions don’t
nonpassive income. See Recharacteriza- portfolio income as property held in a nonpas- include the following items.
tion of Passive Income, later. sive activity and as property held for invest- • Deductions for expenses (other than inter-
• Overall gain from any interest in a publicly ment. Also, treat the date you agree to transfer est expense) that are clearly and directly
traded partnership. See Publicly Traded your interest for a fixed or determinable amount allocable to portfolio income.
Partnerships (PTPs) in the instructions for as the disposition date. • Qualified home mortgage interest, capital-
Form 8582. ized interest expenses, and other interest

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expenses (other than self-charged inter- such item multiplied by the fraction obtained by considering all the other loss limitations, com-
est) properly allocable to passive activities. dividing: plete Form 461, Limitation on Business Losses,
For more information on self-charged inter- 1. The amount of your share of S corporation to figure the amount of your excess business
est, see Self-charged interest under Pas- loss that’s disallowed for the tax year, by loss. See Form 461 and its instructions for de-
sive Activity Income and Deductions, ear- tails on the excess business loss limitation.
lier. 2. The sum of your pro rata shares of all
• Losses from dispositions of property that items of deduction and loss of the corpora-
produce portfolio income or property held tion for the tax year. Grouping Your Activities
for investment.
• State, local, and foreign income taxes. Proration of deductions disallowed un- You can treat one or more trade or business ac-
• Miscellaneous itemized deductions that der at-risk limitation. If any amount of your tivities, or rental activities, as a single activity if
may be disallowed because of the loss from an activity (as defined in Activities those activities form an appropriate economic
2%-of-adjusted-gross-income limit (ex- Covered by the At-Risk Rules, later) is disal- unit for measuring gain or loss under the pas-
pired for 2018 through 2025). lowed under the at-risk rules for the tax year, a sive activity rules.
• Charitable contribution deductions. ratable portion of each item of deduction or loss
• Net operating loss deductions. from the activity is disallowed for the tax year. Grouping is important for a number of rea-
• Percentage depletion carryovers for oil and For this purpose, the ratable portion of an item sons. If you group two activities into one larger
gas wells. of deduction or loss is the amount of such item activity, you need only show material participa-
• Capital loss carrybacks and carryovers. multiplied by the fraction obtained by dividing: tion in the activity as a whole. But if the two ac-
tivities are separate, you must show material
• Items of deduction from a passive activity 1. The amount of the loss from the activity participation in each one. On the other hand, if
that are disallowed under the limits on de- that’s disallowed for the tax year, by you group two activities into one larger activity
ductions that apply before the passive ac- and you dispose of one of the two, then you
tivity rules. See Coordination with other 2. The sum of all deductions from the activity
limitations on deductions that apply before for the taxable year. have disposed of only part of your entire inter-
est in the activity. But if the two activities are
the passive activity rules, later. Separately identified items of deduction separate and you dispose of one of them, then
• Deductions and losses that would have and loss. In identifying the items of deduction you have disposed of your entire interest in that
been allowed for tax years beginning be- and loss from an activity that aren’t disallowed activity.
fore 1987 but for basis or at-risk limits. under the basis and at-risk limitations (and that
• Net negative section 481 adjustments allo- therefore may be treated as passive activity de- Grouping can also be important in determin-
cated to activities other than passive activi- ductions), you needn’t account separately for ing whether you meet the 10% ownership re-
ties. (Section 481 adjustments are adjust- any item of deduction or loss unless such item quirement for actively participating in a rental
ments required due to changes in may, if separately taken into account, result in real estate activity.
accounting methods.) an income tax liability different from that which
• Casualty and theft losses, unless losses would result were such item of deduction or Appropriate Economic Units
similar in cause and severity recur regu- loss taken into account separately.
larly in the activity. Items of deduction or loss that must be ac- Generally, to determine if activities form an ap-
• The deduction allowed for the deductible counted for separately include (but aren’t limi- propriate economic unit, you must consider all
part of self-employment tax. ted to) items of deduction or loss that: the relevant facts and circumstances. You can
Coordination with other limitations on de- 1. Are attributable to separate activities. See use any reasonable method of applying the rel-
ductions that apply before the passive ac- Grouping Your Activities, later. evant facts and circumstances in grouping ac-
tivities. The following factors have the greatest
tivity rules. An item of deduction from a pas- 2. Arise in a rental real estate activity in tax weight in determining whether activities form an
sive activity that’s disallowed for a tax year years in which you actively participate in appropriate economic unit. All of the factors
under the basis or at-risk limitations isn’t a pas- such activity. don’t have to apply to treat more than one activ-
sive activity deduction for the tax year. The fol- ity as a single activity. The factors that you
lowing sections provide rules for figuring the ex- 3. Arise in a rental real estate activity in taxa-
tent to which items of deduction from a passive ble years in which you don’t actively par- should consider are:
activity are disallowed for a tax year under the ticipate in such activity. 1. The similarities and differences in the
basis or at-risk limitations. 4. Arose in a taxable year beginning before types of trades or businesses;
Proration of deductions disallowed un- 1987 and weren’t allowed for such taxable 2. The extent of common control;
der basis limitations. If any amount of your year under the basis or at-risk limitations.
3. The extent of common ownership;
distributive share of a partnership's loss for the 5. Are taken into account under section
tax year is disallowed under the basis limitation, 613A(d) (relating to limitations on certain 4. The geographical location; and
a ratable portion of your distributive share of depletion deductions). 5. The interdependencies between or among
each item of deduction or loss of the partner- activities, which may include the extent to
ship is disallowed for the tax year. For this pur- 6. Are taken into account under section 1211
pose, the ratable portion of an item of deduction (relating to the limitation on capital losses). which the activities:
or loss is the amount of such item multiplied by 7. Are taken into account under section 1231 a. Buy or sell goods between or among
the fraction obtained by dividing: (relating to property used in a trade or themselves,
1. The amount of your distributive share of business and involuntary conversions). b. Involve products or services that are
partnership loss that’s disallowed for the See Section 1231 Gains and Losses in generally provided together,
taxable year, by Pub. 544 for more information.
c. Have the same customers,
2. The sum of your distributive shares of all 8. Are attributable to pre-enactment interests
items of deduction and loss of the partner- in activities. See Regulations section d. Have the same employees, or
ship for the tax year. 1.469-11T(c). e. Use a single set of books and records
If any amount of your pro rata share of an S Excess business loss limitation that ap- to account for the activities.
corporation's loss for the tax year is disallowed plies after the passive activity rules. If you Example 1. Jackie owns a bakery and a
under the basis limitation, a ratable portion of are a noncorporate taxpayer and have allowa- movie theater at a shopping mall in Baltimore
your pro rata share of each item of deduction or ble business losses after considering first the and a bakery and movie theater in Philadelphia.
loss of the S corporation is disallowed for the at-risk limitations and then the passive loss limi- Based on all the relevant facts and circumstan-
tax year. For this purpose, the ratable portion of tations (Form 8582), your losses may be sub- ces, there may be more than one reasonable
an item of deduction or loss is the amount of ject to the excess business loss limitation. After method for grouping Jackie's activities. For
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example, Jackie may be able to group the Plum Tower with the same ownership interest • With activities conducted directly by you,
movie theaters and the bakeries into: (100% in each). If the grouping forms an appro- or
• One activity, priate economic unit, as discussed earlier, Fin- • With activities conducted through other en-
• A movie theater activity and a bakery activ- ley and Taylor can group Plum Tower's grocery tities.
ity, store rental and Healthy Food's grocery busi-
• A Baltimore activity and a Philadelphia ac- ness into a single trade or business activity. You may not treat activities grouped to-
tivity, or ! gether by the entity as separate activi-
• Four separate activities. Grouping of real and personal property CAUTION ties.
rentals. In general, you can’t treat an activity
Example 2. Pat is a partner in ABC partner- involving the rental of real property and an ac- Personal service and closely held cor-
ship, which sells nonfood items to grocery tivity involving the rental of personal property as porations. You may group an activity conduc-
stores. Pat is also a partner in DEF (a trucking a single activity. However, you can treat them ted through a personal service or closely held
business). ABC and DEF are under common as a single activity if you provide the personal corporation with your other activities only to de-
control. The main part of DEF's business is property in connection with the real property or termine whether you materially or significantly
transporting goods for ABC. DEF is the only the real property in connection with the per- participated in those other activities. See Mate-
trucking business in which Pat is involved. sonal property. rial Participation, earlier, and Significant Partici-
Based on the rules of this section, Pat treats pation Passive Activities, later.
ABC's wholesale activity and DEF's trucking ac- Certain activities may not be grouped: limi-
tivity as a single activity. ted partnerships and limited entrepreneurs. Publicly traded partnership (PTP). You
In general, if you own an interest as a limited may not group activities conducted through a
Consistency and disclosure requirement. partner or a limited entrepreneur in one of the PTP with any other activity, including an activity
Generally, when you group activities into appro- following activities, you may not group that ac- conducted through another PTP.
priate economic units, you may not regroup tivity with any other activity in another type of
those activities in a later tax year. You must business. Partial dispositions. If you dispose of sub-
meet any disclosure requirements of the IRS • Holding, producing, or distributing motion stantially all of an activity during your tax year,
when you first group your activities and when picture films or video tapes. you may treat the part disposed of as a sepa-
you add or dispose of any activities in your • Farming. rate activity. However, you can do this only if
groupings. • Leasing any section 1245 property (as de- you can show with reasonable certainty:
However, if the original grouping is clearly fined in section 1245(a)(3) of the Internal • The amount of deductions and credits dis-
inappropriate or there is a material change in Revenue Code). For a list of section 1245 allowed in prior years under the passive
the facts and circumstances that makes the property, see Section 1245 property under activity rules that’s allocable to the part of
original grouping clearly inappropriate, you Activities Covered by the At-Risk Rules, the activity disposed of, and
must regroup the activities and comply with any later. • The amount of gross income and any other
disclosure requirements of the IRS. • Exploring for, or exploiting, oil and gas re- deductions and credits for the current tax
sources. year that are allocable to the part of the ac-
See Disclosure Requirement, later. Exploring for, or exploiting, geothermal de- tivity disposed of.
•
Regrouping by the IRS. If any of the activities posits.
resulting from your grouping isn’t an appropriate If you own an interest as a limited partner or
economic unit and one of the primary purposes a limited entrepreneur in an activity described in Regrouping Due to Net Investment
of your grouping (or failure to regroup) is to the list above, you may group that activity with Income Tax
avoid the passive activity rules, the IRS may re- another activity in the same type of business if
group your activities. the grouping forms an appropriate economic You may be able to regroup your activities, as
unit as discussed earlier. described below, if you’re subject to the Net In-
Rental activities. In general, you can’t group a vestment Income Tax (NIIT) for the first time.
rental activity with a trade or business activity. Limited entrepreneur. A limited entrepre- For detailed information, see Regulations sec-
However, you can group them together if the neur is a person who: tion 1.469-11(b)(3)(iv).
activities form an appropriate economic unit • Has an interest in an enterprise other than
and: as a limited partner, and Regrouping on an original return. Under the
• The rental activity is insubstantial in rela- • Doesn’t actively participate in the manage- NIIT “fresh start” election, you may regroup for
tion to the trade or business activity; ment of the enterprise. the first tax year you are subject to the NIIT
• The trade or business activity is insubstan- Certain activities may not be grouped: (without regard to the effect of regrouping). You
tial in relation to the rental activity; or trading activities. A trading activity of trading may regroup only once under this election and
• Each owner of the trade or business activ- personal property is not a passive activity. Per- that regrouping will apply to the tax year for
ity has the same ownership interest in the sonal property is any personal property that is which you regroup and all future tax years. You
rental activity, in which case the part of the actively traded, (for example, financial securi- are eligible to regroup if:
rental activity that involves the rental of ties). A taxpayer who does not materially partic- 1. You were not previously subject to the
items of property for use in the trade or ipate in a trading activity is prohibited from NIIT;
business activity may be grouped with the grouping the activity with any other activity in-
trade or business activity. cluding any other trading activity. The prohibi- 2. The amount you would have entered on
tion on grouping is effective for taxable years Form 8960, line 12, without the regroup-
Example. Finley and Taylor are married beginning on or after March 22, 2021. If you are ing, would have been greater than zero;
and file a joint return. Healthy Food, an S corpo- a calendar year taxpayer, the new provisions and
ration, is a grocery store business. Finley is apply to you in calendar year 2022. 3. The amount you would have entered on
Healthy Food's only shareholder. Plum Tower,
Form 8960, line 13, without the regroup-
an S corporation, owns and rents out the build- Activities conducted through another en- ing, would have been greater than the
ing. Taylor is Plum Tower's only shareholder. tity. A personal service corporation, closely amount you would have entered on Form
Plum Tower rents part of its building to Healthy held corporation, partnership, or S corporation 8960, line 14, without the regrouping.
Food. Plum Tower's grocery store rental busi- must group its activities using the rules dis-
ness and Healthy Food's grocery business cussed in this section. Once the entity groups Regrouping on an amended return. You
aren’t insubstantial in relation to each other. its activities, you, as the partner or shareholder may regroup your activities on an amended tax
Finley and Taylor file a joint return, so of the entity, may group those activities (follow- return, but only if you were not subject to the
they’re treated as one taxpayer for purposes of ing the rules of this section): NIIT on your original return (or previously amen-
the passive activity rules. The same owner (Fin- • With each other, ded return). You are eligible if:
ley and Taylor) owns both Healthy Food and

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1. You were not previously subject to the Regrouping. You must file a written statement you normally use. However, see Significant Par-
NIIT for the tax year for which you are filing with your original income tax return for the tax ticipation Passive Activities, later, if the activity
an amended return or any prior tax year; year in which you regroup the activities. The is a significant participation passive activity and
2. The changes on the amended return statement must provide the names, addresses, you also have a net loss from a different signifi-
cause you to be subject to the NIIT for the and EINs, if applicable, for the activities that are cant participation passive activity.
first time beginning in the taxable year for being regrouped. If two or more activities are
which you are amending the return; being regrouped into a single activity, the state- Limit on recharacterized passive income.
ment must contain a declaration that the regrou- The total amount that you treat as nonpassive
3. The limitation period for assessments un- ped activities make up an appropriate economic income under the rules described later in this
der Code section 6501 hasn’t ended; unit for the measurement of gain or loss under discussion for significant participation passive
4. The changes on your amended return the passive activity rules. In addition, the state- activities, rental of nondepreciable property,
cause the amount on Form 8960, line 12, ment must contain an explanation of the mate- and equity-financed lending activities can’t ex-
of your amended return to be greater than rial change in the facts and circumstances that ceed the greatest amount that you treat as non-
zero; and made the original grouping clearly inappropri- passive income under any one of these rules.
ate.
5. The changes on your amended return Investment income and investment ex-
cause the amount on Form 8960, line 13, Groupings by partnerships and S corpora- pense. To figure your investment interest ex-
of your amended return to be greater than tions. Partnerships and S corporations aren’t pense limitation on Form 4952, treat as invest-
the amount entered on Form 8960, line 14. subject to the rules for new grouping, addition ment income any net passive income
to an existing grouping, or regrouping. Instead, recharacterized as nonpassive income from
This rule applies equally to changes to they must comply with the disclosure instruc- rental of nondepreciable property, equity-fi-
modified adjusted gross income or net invest- tions for grouping activities provided in their nanced lending activity, or licensing of intangi-
ment income upon an IRS examination. Form 1065, U.S. Return of Partnership Income, ble property by a pass-through entity.
or Form 1120-S, U.S. Income Tax Return for an
Manner of regrouping. If you regroup your S Corporation, whichever is applicable. Significant Participation
activities under this rule, you must attach to The partner or shareholder isn’t required to Passive Activities
your original or amended return, as applicable, make a separate disclosure of the groupings
a statement that satisfies the requirements de- disclosed by the entity unless the partner or A significant participation passive activity is any
scribed in Regrouping under Disclosure Re- shareholder: trade or business activity in which you participa-
•
quirement, later. Groups together any of the activities that ted for more than 100 hours during the tax year
the entity doesn’t group together, but didn’t materially participate.
Disclosure Requirement • Groups the entity's activities with activities
conducted directly by the partner or share-
For tax years beginning after January 24, 2010, holder, or If your gross income from all significant par-
the following disclosure requirements for group- • Groups an entity's activities with activities ticipation passive activities is more than your
ings apply. You’re required to report certain conducted through another entity. deductions from those activities, a part of your
changes to your groupings that occur during the net income from each significant participation
tax year to the IRS. If you fail to report these A partner or shareholder may not treat activ- passive activity is treated as nonpassive in-
changes, each trade or business activity or ities grouped together by the entity as separate come.
rental activity will be treated as a separate activ- activities.
ity. You will be considered to have made a Corporations. An activity of a personal service
timely disclosure if you filed all affected income Recharacterization corporation or closely held corporation is a sig-
nificant participation passive activity if both of
tax returns consistent with the claimed grouping of Passive Income the following statements are true.
and make the required disclosure on the in-
come tax return for the year in which you first Net income from the following passive activities • The corporation isn’t treated as materially
discovered the failure to disclose. If the IRS dis- may have to be recharacterized and excluded participating in the activity for the year.
covered the failure to disclose, you must have from passive activity income. • One or more individuals, each of whom is
reasonable cause for not making the required • Significant participation passive activities, treated as significantly participating in the
disclosure. • Rental of property when less than 30% of activity, directly or indirectly hold (in total)
the unadjusted basis of the property is sub- more than 50% (by value) of the corpora-
New grouping. You must file a written state- ject to depreciation, tion's outstanding stock.
ment with your original income tax return for the • Equity-financed lending activities, Worksheet A. Complete Worksheet A. Signifi-
first tax year in which two or more activities are • Rental of property incidental to develop- cant Participation Passive Activities if you have
originally grouped into a single activity. The ment activities, income or losses from any significant participa-
statement must provide the names, addresses, • Rental of property to nonpassive activities, tion activity. Begin by entering the name of each
and employer identification numbers (EINs), if and activity in the left column.
applicable, for the activities being grouped as a • Licensing of intangible property by
single activity. In addition, the statement must pass-through entities. Column (a). Enter the number of hours you
contain a declaration that the grouped activities participated in each activity and total the col-
make up an appropriate economic unit for the If you’re engaged in or have an interest in one
measurement of gain or loss under the passive of these activities during the tax year (either di- umn.
activity rules. rectly or through a partnership or an S corpora- If the total is more than 500, don’t complete
tion), combine the income and losses from the Worksheet A or B. None of the activities are
Addition to an existing grouping. You must activity to determine if you have a net loss or net passive activities because you satisfy test 4 for
file a written statement with your original income income from that activity. material participation. (See Material participa-
tion tests, earlier.) Report all the income and
tax return for the tax year in which you add a If the result is a net loss, treat the income losses from these activities on the forms and
new activity to an existing group. The statement and losses the same as any other income or schedules you normally use. Don’t include the
must provide the name, address, and EIN, if ap- losses from that type of passive activity (trade income and losses on Form 8582.
plicable, for the activity that’s being added and or business activity or rental activity).
for the activities in the existing group. In addi- Column (b). Enter the net loss, if any, from
tion, the statement must contain a declaration If the result is net income, don’t enter any of
that the activities make up an appropriate eco- the income or losses from the activity or prop- the activity. Net loss from an activity means ei-
nomic unit for the measurement of gain or loss erty on Form 8582 or its separate parts, as they ther:
under the passive activity rules. are recharacterized as nonpassive. Instead, en- • The activity's current-year net loss (if any)
ter income or losses on the form and schedules plus prior-year unallowed losses (if any), or

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•   The excess of prior-year unallowed losses          the  current-year  net  income  from  the  activity     Worksheet B. Significant Participation Activities 
    over the current-year net income (if any).         over  any  prior-year  unallowed  losses  from  the     With  Net  Income.  Include  the  income  and  los-
    Enter -0- here if the prior-year unallowed         activity.                                               ses in Part V of Form 8582 (or Worksheet 2 in 
    loss is the same as the current-year net in-                                                               the Form 8810 instructions).
    come.                                               Column  (d). Combine  amounts  in  the   To-
                                                       tals  row  for  columns  (b)  and  (c)  and  enter  the 
Column (c).   Enter net income (if any) from           total net income or net loss in the Totals row of 
the  activity.  Net  income  means  the  excess  of    column  (d).  If  column  (d)  is  a  net  loss,  skip 

Worksheet A. Significant Participation Passive Activities                                                             Keep for Your Records
           Name of activity                    (a) Hours of          (b) Net loss                     (c) Net income            (d) Combine totals of cols. (b) 
                                               participation                                                                               and (c)
                                                                 (                         )
                                                                 (                         )
                                                                 (                         )
                                                                 (                         )
                                                                 (                         )
                                                                 (                         )
                                                                 (                         )
                               Totals                            (                         )
Worksheet  B. On     Worksheet  B.  Significant         Column (d).  Subtract column (c) from col-             Example.   Charlie  acquires  vacant  land  for 
Participation  Activities  With  Net  Income,  list    umn  (a).  To  this  figure,  add  the  amount  of      $300,000, constructs improvements at a cost of 
only the significant participation passive activi-     prior-year  unallowed  losses  (if  any)  that  re-     $100,000,  and  leases  the  land  and  improve-
ties that have net income as shown in column           duced  the  current-year  net  income.  Enter  the      ments  to  a  tenant.  Charlie  then  sells  the  land 
(c) of Worksheet A.                                    result  in  column  (d).  Enter  these  amounts  on     and  improvements  for  $600,000,  realizing  a 
                                                       Part V of Form 8582 or Worksheet 2 in the Form          gain of $200,000 on the disposition.
Column (a).   Enter the net income of each             8810 instructions. (Also, see Limit on recharac-        The  unadjusted  basis  of  the  improvements 
activity from column (c) of Worksheet A.               terized passive income, earlier.)                       ($100,000) equals 25% of the unadjusted basis 
Column  (b).  Divide  each  of  the  individual                                                                of all property ($400,000) used in the rental ac-
net income amounts in column (a) by the total of       Rental of Nondepreciable Property                       tivity.
column (a). The result is a ratio. In column (b),                                                              Charlie's net passive income from the activ-
enter  the  ratio  for  each  activity  as  a  decimal If  you  have  net  passive  income  (including         ity (which is figured with the gain from the dis-
(rounded to at least three places). The total of       prior-year unallowed losses) from renting prop-         position, including gain from the improvements) 
these ratios must equal 1.000.                         erty in a rental activity, and less than 30% of the     is treated as nonpassive income.
                                                       unadjusted  basis  of  the  property  is  subject  to 
Column (c).   Multiply the amount in the    To-        depreciation, you treat the net passive income 
tals row of column (d) of Worksheet A by each          as nonpassive income.
of the ratios in column (b). Enter the results in 
column (c).

Worksheet B. Significant Participation Activities With Net Income                                                     Keep for Your Records
           Name of activity                    (a) Net income                (b) Ratio           (c) Nonpassive income          (d) Passive income 
           with net income                                           (see instructions)          (see instructions)       (subtract col. (c) from col. (a))
                                                                                                                          
                               Totals                                        1.000
Equity-Financed                                        Rental of Property Incidental                           • You started to rent the property less than 
Lending Activities                                     to a Development Activity                                 12 months before the date of disposition.
                                                                                                               • You materially participated or significantly 
If  you  have  gross  income  from  an  equity-fi-     Net income from this type of activity will be trea-       participated for any tax year in an activity 
nanced  lending  activity,  the  lesser  of  the  net  ted as nonpassive income if all of the following          that involved the performance of services 
passive  income  or  the  equity-financed  interest    apply.                                                    for the purpose of enhancing the value of 
income is nonpassive income.                           •   You recognize gain from the sale, ex-                 the property (or any other item of property 
                                                           change, or other disposition of the rental            if the basis of the property disposed of is 
                                                           property during the tax year.                         determined in whole or in part by reference 
For more information, see Temporary Regu-                                                                        to the basis of that item of property).
lations section 1.469-2T(f)(4).

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For more information, see Regulations sec- If you have a capital loss on the dispo- in the year of disposition. This includes any gain
tion 1.469-2(f)(5). ! sition of an interest in a passive activ- recognized on a distribution of money from the
CAUTION ity, the loss may be limited. For individ- partnership that you receive in excess of the ad-
Rental of Property to uals, your capital loss deduction is limited to the justed basis of your partnership interest.
a Nonpassive Activity amount of your capital gains plus the lower of These rules also apply to the disposition of
$3,000 ($1,500 in the case of a married individ- stock in an S corporation.
If you rent property to a trade or business activ- ual filing a separate return) or the excess of
ity in which you materially participated, net your capital losses over capital gains. See Pub. Dispositions by gift. If you give away your in-
rental income from the property is treated as 544 for more information. terest in a passive activity, the unused passive
nonpassive income. This rule doesn’t apply to activity losses allocable to the interest can’t be
net income from renting property under a writ- Example. Carter earned a $60,000 salary deducted in any tax year. Instead, the basis of
ten binding contract entered into before Febru- and owned one passive activity through a 5% the transferred interest must be increased by
ary 19, 1988. It also doesn’t apply to property interest in the B Limited Partnership. In 2022, the amount of these losses.
described earlier under Rental of Property Inci- Carter sold that entire partnership interest to an
dental to a Development Activity. unrelated person for $30,000. Carter’s adjusted Dispositions by death. If a passive activity in-
basis in the partnership interest was $42,000, terest is transferred because the owner dies,
Licensing of Intangible Property and Carter had carried over $2,000 of ordinary unused passive activity losses are allowed (to a
by Pass-Through Entities passive activity deductions from the activity. certain extent) as a deduction against the dece-
Carter's deductible loss for 2022 is $5,000, dent's income in the year of death. The dece-
Net royalty income from intangible property figured as follows. dent's losses are allowed only to the extent they
exceed the amount by which the transferee's
held by a pass-through entity in which you own Amount realized . . . . . . . . . . . . . . . . . . . . $30,000 basis in the passive activity has been increased
an interest may be treated as nonpassive roy- under the rules for determining the basis of
alty income. This applies if you acquired your Minus: adjusted basis . . . . . . . . . . . . . . . –42,000
property acquired from a decedent. For exam-
interest in the pass-through entity after the part- Capital loss . . . . . . . . . . . . . . . . . . . . . . $12,000 ple, if the basis of an interest in a passive activ-
nership, S corporation, estate, or trust created ity in the hands of a transferee is increased by
the intangible property or performed substantial Minus: capital loss limit . . . . . . . . . . . . . . –3,000
$6,000 and unused passive activity losses of
services or incurred substantial costs for devel- Capital loss carryover . . . . . . . . . . . . . . . $9,000 $8,000 were allocable to the interest at the date
oping or marketing the intangible property. of death, then the decedent's deduction for the
Allowable capital loss on sale . . . . . . . . . . $3,000 tax year would be limited to $2,000 ($8,000 −
This recharacterization rule doesn’t apply if: Carryover losses allowable . . . . . . . . . . . . 2,000 $6,000).
1. The expenses reasonably incurred by the Total current deductible loss . . . . . . . . . . . $5,000 If you inherited property from a decedent
entity in developing or marketing the prop- who died in 2010, special rules may apply if the
erty exceed 50% of the gross royalties executor of the estate filed Form 8939, Alloca-
from licensing the property that are includi- Carter deducts the $5,000 total current de- tion of Increase in Basis for Property Acquired
ble in your gross income for the tax year, ductible loss in 2022 and must carry over the From a Decedent. For more information, see
or remaining $9,000 capital loss, which isn’t sub- Pub. 4895, Tax Treatment of Property Acquired
2. Your share of the expenses reasonably in- ject to the passive activity loss limit. Carter will From a Decedent Dying in 2010, which is avail-
curred by the entity in developing or mar- treat it like any other capital loss carryover. able at IRS.gov/pub/irs-prior/p4895--2011.pdf.
keting the property for all tax years excee- Partial dispositions. If you dispose of sub-
ded 25% of the fair market value of your Installment sale of an entire interest. If you
interest in the intangible property at the sell your entire interest in a passive activity stantially all of an activity during your tax year,
time you acquired your interest in the en- through an installment sale to figure the loss for you may be able to treat the part of the activity
tity. the current year that isn’t limited by the passive disposed of as a separate activity. See Partial
activity rules, multiply your overall loss (not in- dispositions under Grouping Your Activities,
For purposes of (2) above, capital expendi- cluding losses allowed in prior years) by a frac- earlier.
tures are taken into account for the entity's tax tion. The numerator of the fraction is the gain
year in which the expenditure is chargeable to a recognized in the current year, and the denomi- How To Report Your
capital account, and your share of the expendi- nator is the total gain from the sale minus all
ture is figured as if it were allowed as a deduc- gains recognized in prior years. Passive Activity Loss
tion for the tax year. More than one form or schedule may be re-
Example. Riley has a total gain of $10,000 quired for reporting your passive activities. The
from the sale of an entire interest in a passive actual number of forms depends on the number
Dispositions activity. Under the installment method, Riley re- and types of activities you must report. Some
ports $2,000 of gain each year, including the forms and schedules that may be required are:
Any passive activity losses (but not credits) that year of sale. For the first year, 20% Schedule C (Form 1040), Profit or Loss
haven’t been allowed (including current-year (2,000/10,000) of the losses are allowed. For •
From Business;
losses) are generally allowed in full in the tax the second year, 25% (2,000/8,000) of the re- Schedule D (Form 1040), Capital Gains
year you dispose of your entire interest in the maining losses are allowed. •
passive (or former passive) activity. However, and Losses;
for the losses to be allowed, you must dispose Partners and S corporation shareholders. • Schedule E (Form 1040), Supplemental In-
of your entire interest in the activity in a transac- Generally, any gain or loss on the disposition of come and Loss;
tion in which all realized gain or loss is recog- a partnership interest must be allocated to each • Schedule F (Form 1040), Profit or Loss
nized. Also, the person acquiring the interest trade or business, rental, or investment activity From Farming;
from you must not be related to you. in which the partnership owns an interest. If you • Form 4797, Sales of Business Property;
dispose of your entire interest in a partnership, • Form 6252, Installment Sale Income;
the passive activity losses from the partnership • Form 8582, Passive Activity Loss Limita-
that haven’t been allowed are generally allowed tions;
in full. They will also be allowed if the partner- • Form 8582-CR, Passive Activity Credit
ship (other than a PTP) disposes of all the prop- Limitations; and
erty used in that passive activity. • Form 8949, Sales and Other Dispositions
of Capital Assets.
If you don’t dispose of your entire interest,
the gain or loss allocated to a passive activity is Regardless of the number or complexity of
treated as passive activity income or deduction passive activities you have, you should use only
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one Form 8582. If you need additional lines for See Coordination with other limitations on 6. Any other activity not included in (1)
any of the Form 8582 parts, you can either use deductions that apply before the passive activ- through (5) that’s carried on as a trade or
copies of page 1, page 2, and/or page 3 of ity rules, earlier. business or for the production of income.
Form 8582, whichever is applicable, or your See also Excess business loss limitation
own schedule that’s in the same format as the that applies after the passive activity rules, ear- Section 1245 property. Section 1245 prop-
applicable part. lier, for limitations that may apply after an allow- erty includes any property that is or has been
able passive activity loss is determined. subject to depreciation or amortization and is:
For examples and further information, see 1. Personal property,
the Form 8582 instructions.
Who Is Affected? 2. Other tangible property (other than a build-
ing or its structural components) that’s:
At-Risk Limits The at-risk limits apply to individuals (including
partners and S corporation shareholders), es- a. Used in manufacturing, production,
The at-risk rules limit your losses from most ac- tates, trusts, and certain closely held C corpora- extraction, or furnishing transporta-
tivities to your amount at risk in the activity. You tions. tion, communications, electrical en-
ergy, gas, water, or sewage disposal
treat any loss that’s disallowed because of the services,
at-risk limits as a deduction from the same ac- Closely held C corporation. For the at-risk
tivity in the next tax year. If your losses from an rules, a C corporation is a closely held corpora- b. A research facility used for the activi-
at-risk activity are allowed, they’re subject to re- tion if at any time during the last half of the tax ties in (a), or
capture in later years if your amount at risk is re- year, more than 50% in value of its outstanding
duced below zero. stock is owned directly or indirectly by or for five c. A facility used in any of the activities
or fewer individuals. in (a) for the bulk storage of fungible
You must apply the at-risk rules before To figure if more than 50% in value of the commodities,
! the passive activity rules discussed in stock is owned by five or fewer individuals, ap- 3. Real property (other than property descri-
CAUTION the first part of this publication. ply the following rules. bed in (2)) with an adjusted basis that was
1. Stock owned directly or indirectly by or for reduced by certain amortization deduc-
Loss defined. A loss is the excess of allowa- a corporation, partnership, estate, or trust tions listed in section 1245(a)(3)(C) of the
ble deductions from the activity for the year (in- is considered owned proportionately by its Internal Revenue Code,
cluding depreciation or amortization allowed or shareholders, partners, or beneficiaries. 4. A single-purpose agricultural or horticul-
allowable and disregarding the at-risk limits) tural structure, or
over income received or accrued from the activ- 2. An individual is considered to own the
ity during the year. Income doesn’t include in- stock owned directly or indirectly by or for 5. A storage facility (other than a building or
come from the recapture of previous losses their family. Family includes only brothers its structural components) used for the dis-
(discussed, later, under Recapture Rule). and sisters (including half brothers and tribution of petroleum.
half sisters), a spouse, ancestors, and lin-
Form 6198. Use Form 6198 to figure how eal descendants. Exception for holding real property placed
in service before 1987. The at-risk rules don’t
much loss from an activity you can deduct. 3. If a person holds an option to buy stock, apply to the holding of real property placed in
1. File Form 6198 with your tax return if: they are considered to be the owner of service before 1987. They also don’t apply to
that stock.
a. You have a loss from any part of an the holding of an interest acquired before 1987
activity that’s covered by the at-risk 4. When applying rule (1) or (2), stock con- in a pass-through entity engaged in holding real
rules, and sidered owned by a person under rule (1) property placed in service before 1987. This ex-
or (3) is treated as actually owned by that ception doesn’t apply to holding mineral prop-
b. You aren’t at risk for some of your in- person. Stock considered owned by an in- erty.
vestment in the activity. dividual under rule (2) isn’t treated as Personal property and services that are inci-
2. File Form 6198 if you’re engaged in an ac- owned by the individual for again applying dental to making real property available as liv-
tivity included in (6) under Activities Cov- rule (2) to consider another the owner of ing accommodations are included in the activity
ered by the At-Risk Rules, later, and you that stock. of holding real property. For example, making
have borrowed amounts described in Cer- 5. Stock that may be considered owned by personal property, such as furniture, and serv-
tain borrowed amounts excluded under an individual under either rule (2) or (3) is ices available when renting a hotel or motel
At-Risk Amounts, later. considered owned by the individual under room or a furnished apartment is considered in-
rule (3). cidental to making real property available as liv-
Loss limits for partners and S corporation ing accommodations.
shareholders. Four separate limits may apply
to a partner's or shareholder's distributive share Activities Covered Exception for equipment leasing by a
of an item of deduction or loss from a partner- by the At-Risk Rules closely held corporation. If a closely held
ship or S corporation, respectively. The limits corporation is actively engaged in equipment
leasing, the equipment leasing is treated as a
determine the amount each partner or share- If you’re involved in one of the following activi- separate activity not covered by the at-risk
holder can deduct on their own return. These ties as a trade or business or for the production rules. A closely held corporation is actively en-
limits and the order in which they apply are: of income, you’re subject to the at-risk rules. gaged in equipment leasing if 50% or more of
1. The adjusted basis of: 1. Holding, producing, or distributing motion its gross receipts for the tax year are from
a. The partner's partnership interest, or picture films or video tapes. equipment leasing. Equipment leasing means
the leasing, purchasing, servicing, and selling of
b. The shareholder's stock plus any 2. Farming. equipment that’s section 1245 property.
loans the shareholder makes to the 3. Leasing section 1245 property, including However, equipment leasing doesn’t include
corporation, personal property and certain other tangi- the leasing of master sound recordings and
2. The at-risk rules, and ble property that’s depreciable or amortiz- similar contractual arrangements for tangible or
3. The passive activity rules. able. See Section 1245 property, later. intangible assets associated with literary, artis-
4. Exploring for, or exploiting, oil and gas. tic, or musical properties, such as books, litho-
See Limitations on Losses, Deductions, and graphs of artwork, or musical tapes. A closely
Credits in Partner's Instructions for Sched- 5. Exploring for, or exploiting, geothermal de- held corporation can’t exclude these leasing ac-
ule K-1 (Form 1065) and Shareholder's Instruc- posits (for wells started after September tivities from the at-risk rules nor count them as
tions for Schedule K-1 (Form 1120-S). 1978). equipment leasing for the gross receipts test.

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The  equipment  leasing  exclusion  also  isn’t         Separation of Activities                                 Amounts  borrowed.    You’re  at  risk  for 
available  for  leasing  activities  related  to  other                                                          amounts borrowed to use in the activity if you’re 
at-risk  activities,  such  as  motion  picture  films  Generally, you treat your activity involving each        personally  liable  for  repayment.  You’re  also  at 
and  video  tapes,  farming,  oil  and  gas  proper-    film or video tape, item of leased section 1245          risk  if  the  amounts  borrowed  are  secured  by 
ties, and geothermal deposits. For example, if a        property, farm, oil and gas property, or geother-        property other than property used in the activity. 
closely held corporation leases a video tape, it        mal property as a separate activity. In addition,        In  this  case,  the  amount  considered  at  risk  is 
can’t  exclude  this  leasing  activity  from  the      each  investment  that  isn’t  a  part  of  a  trade  or the net fair market value of your interest in the 
at-risk rules under the equipment leasing exclu-        business is treated as a separate activity.              pledged property. The net fair market value of 
sion.                                                                                                            property is its fair market value (determined on 
                                                        Leasing by a partnership or S corporation.               the date the property is pledged) less any prior 
Controlled group of corporations.       A con-          For a partnership or S corporation, treat all leas-      (or superior) claims to which it’s subject. How-
trolled group of corporations is subject to spe-        ing  of  section  1245  property  that’s  placed  in     ever, no property will be taken into account as 
cial  rules  for  the  equipment  leasing  exclusion.   service in any tax year of the partnership or S          security  if  it’s  directly  or  indirectly  financed  by 
See  section  465(c)  of  the  Internal  Revenue        corporation as one activity.                             debt that’s secured by property you contributed 
Code.                                                                                                            to the activity.
Special  exception  for  qualified  corpora-            Aggregation of Activities                                        If you borrow money to finance a con-
tions. A  qualified  corporation  isn’t  subject  to                                                             !       tribution  to  an  activity,  you  can’t  in-
the at-risk limits for any qualifying business car-     Activities described in (6) under  Activities Cov-       CAUTION crease your amount at risk by the con-
ried on by the corporation. Each qualifying busi-       ered  by  the  At-Risk  Rules,  earlier,  that  consti-  tribution  and  the  amount  borrowed  to  finance 
ness is treated as a separate activity.                 tute a trade or business are treated as one ac-          the contribution. You may increase your at-risk 
                                                        tivity if:                                               amount only once.
Qualified  corporation. A  qualified  corpo-            • You actively participate in the manage-
ration  is  a  closely  held  C  corporation,  defined    ment of the trade or business, or                      Certain  borrowed  amounts  excluded. 
earlier, that isn’t:                                    • The trade or business is carried on by a               Even  if  you’re  personally  liable  for  the  repay-
• A personal holding company, or                          partnership or S corporation and 65% or                ment  of  a  borrowed  amount  or  you  secure  a 
• A personal service corporation (defined in              more of its losses for the tax year are allo-          borrowed amount with property other than prop-
  section 269A(b) of the Internal Revenue                 cable to persons who actively participate in           erty used in the activity, you aren’t considered 
  Code, but determined by substituting 5%                 the management of the trade or business.               at risk if you borrowed the money from a person 
  for 10%).                                             Similar rules apply to activities described in (1)       having an interest in the activity or from some-
Qualifying  business.  A  qualifying  busi-             through (5) of that earlier discussion.                  one related to a person (other than you) having 
ness is any active business if all of the following                                                              an interest in the activity. This doesn’t apply to:
apply.                                                  Active  participation. Active  participation  de-        • Amounts borrowed by a corporation from a 
                                                        pends on all the facts and circumstances. Fac-             person whose only interest in the activity is 
1. During the entire 12-month period ending             tors  that  indicate  active  participation  include       as a shareholder of the corporation,
  on the last day of the tax year, the corpo-           making  decisions  involving  the  operation  or         • Amounts borrowed from a person having 
  ration had at least:                                  management  of  the  activity,  performing  serv-          an interest in the activity as a creditor, or
      a. One full-time employee whose serv-             ices for the activity, and hiring and discharging        • Amounts borrowed after May 3, 2004, se-
        ices were in the active management              employees.  Factors  that  indicate  a  lack  of  ac-      cured by real property used in the activity 
        of the business, and                            tive participation include lack of control in man-         of holding real property (other than mineral 
                                                        aging and operating the activity, having author-           property) that, if nonrecourse, would be 
      b. Three full-time nonowner employees             ity only to discharge the manager of the activity,         qualified nonrecourse financing.
        whose services were directly related            and having a manager of the activity who is an 
        to the business. A nonowner em-                 independent  contractor  rather  than  an  em-           Related  persons.     Related  persons  in-
        ployee is an employee who doesn’t               ployee.                                                  clude:
        own more than 5% in value of the out-                                                                    • Members of a family, but only an individu-
        standing stock of the corporation at            Partners  and  S  corporation  shareholders.               al's brothers and sisters, half brothers and 
        any time during the tax year. (The              Partners or shareholders may aggregate activi-             half sisters, spouse, ancestors (parents, 
        rules for constructive ownership of             ties of their partnership or S corporation within          grandparents, etc.), and lineal descend-
        stock in section 318 of the Internal            each of the following categories.                          ants (children, grandchildren, etc.);
        Revenue Code apply. However, in ap-             • Films and video tapes,                                 • Two corporations that are members of the 
        plying these rules, an owner of 5% or           • Farms,                                                   same controlled group of corporations de-
        more, rather than 50% or more, of the           • Oil and gas properties, and                              termined by applying a 10% ownership 
        value of a corporation's stock is con-          • Geothermal properties.                                   test;
        sidered to own a proportionate share                                                                     • The fiduciaries of two different trusts, or 
        of any stock owned by the corpora-              For example, if a partnership or S corpora-                the fiduciary and beneficiary of two differ-
        tion.)                                          tion produces two films or video tapes, the part-          ent trusts, if the same person is the grantor 
                                                        ners  or  S  corporation  shareholders  may  treat         of both trusts;
2. Deductions due to the business that are              the  production  of  both  films  or  video  tapes  as   • A tax-exempt educational or charitable or-
  allowable to the corporation as business              one activity for purposes of the at-risk rules.            ganization and a person who directly or in-
  expenses and as contributions to certain                                                                         directly controls it (or a member of whose 
  employee benefit plans for the tax year ex-                                                                      family controls it);
  ceed 15% of the gross income from the                 At-Risk Amounts
                                                                                                                 • A corporation and an individual who owns 
  business.                                                                                                        directly or indirectly more than 10% of the 
                                                        You’re at risk in any activity for:
3. The business isn’t an excluded business.                                                                        value of the outstanding stock of the cor-
  Generally, an excluded business means                 1. The money and adjusted basis of property                poration;
  equipment leasing as defined, earlier, un-              you contribute to the activity, and                    • A trust fiduciary and a corporation of which 
  der Exception for equipment leasing by a              2. Amounts you borrow for use in the activity              more than 10% in value of the outstanding 
  closely held corporation, and any business              if:                                                      stock is owned directly or indirectly by or 
  involving the use, exploitation, sale, lease,                                                                    for the trust or by or for the grantor of the 
  or other disposition of master sound re-                a. You’re personally liable for repay-                   trust;
  cordings, motion picture films, video                            ment, or                                      • The grantor and fiduciary, or the fiduciary 
  tapes, or tangible or intangible assets as-             b. You pledge property (other than prop-                 and beneficiary, of any trust;
  sociated with literary, artistic, musical, or                    erty used in the activity) as security for    • A corporation and a partnership if the 
  similar properties.                                              the loan.                                       same persons own more than 10% in value 

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of the outstanding stock of the corporation your deduction of suspended losses may be • A person from which you acquired the
and more than 10% of the capital interest limited by the passive loss rules. property or a person related to that person.
or the profits interest in the partnership; • A person who receives a fee due to your
• Two S corporations if the same persons investment in the real property or a person
own more than 10% in value of the out- Amounts Not at Risk related to that person.
standing stock of each corporation;
• An S corporation and a regular corporation You aren’t considered at risk for amounts pro- Other loss limiting arrangements. Any capi-
if the same persons own more than 10% in tected against loss through nonrecourse financ- tal you have contributed to an activity isn’t at
value of the outstanding stock of each cor- ing, guarantees, stop loss agreements, or other risk if you’re protected against economic loss by
poration; similar arrangements. an agreement or arrangement for compensation
• A partnership and a person who owns di- or reimbursement. For example, you aren’t at
rectly or indirectly more than 10% of the Nonrecourse financing. Nonrecourse financ- risk if you will be reimbursed for part or all of
capital or profits of the partnership; ing is financing for which you aren’t personally any loss because of a binding agreement be-
• Two partnerships if the same persons di- liable. If you borrow money to contribute to an tween yourself and another person.
rectly or indirectly own more than 10% of activity and the lender's only recourse is to your
the capital or profits of each; interest in the activity or the property used in the Example 1. Some commercial feedlots re-
• Two persons who are engaged in business activity, the loan is a nonrecourse loan. imburse investors against any loss sustained on
under common control (within the meaning You aren’t considered at risk for your share sales of the fed livestock above a stated dollar
of section 52(a) and (b)); and of any nonrecourse loan used to finance an ac- amount per head. Under such stop loss orders,
• An executor of an estate and a beneficiary tivity or to acquire property used in the activity the investor is at risk only for the portion of the
of that estate. unless the loan is secured by property not used investor's capital for which the investor isn’t en-
in the activity. titled to a reimbursement.
To determine the direct or indirect owner-
ship of the outstanding stock of a corporation, However, you’re considered at risk for quali-
apply the following rules. fied nonrecourse financing secured by real Example 2. You’re personally liable for a
property used in an activity of holding real prop- mortgage, but you separately obtain insurance
1. Stock owned directly or indirectly by or for erty. Qualified nonrecourse financing is financ- to compensate you for any payments you must
a corporation, partnership, estate, or trust ing for which no one is personally liable for re- actually make because of your personal liability.
is considered owned proportionately by or payment and that’s: You’re considered at risk only to the extent of
for its shareholders, partners, or beneficia- • Borrowed by you in connection with the ac- the uninsured portion of the personal liability to
ries. tivity of holding real property, which you’re exposed. You can include in the
2. Stock owned directly or indirectly by or for • Secured by real property used in the activ- amount you have at risk the amount of any pre-
an individual's family is considered owned ity, mium that you paid from your personal assets
by the individual. The family of an individ- • Not convertible from a debt obligation to an for the insurance. However, if you obtain casu-
ual includes only brothers and sisters, half ownership interest, and alty insurance or insurance protecting yourself
brothers and half sisters, a spouse, ances- • Loaned or guaranteed by any federal, against tort liability, it doesn’t affect the amount
tors, and lineal descendants. state, or local government, or borrowed by you’re otherwise considered to have at risk.
you from a qualified person.
3. Any stock in a corporation owned by an in- Reductions of
dividual (other than by applying rule (2)) is Other types of property used as secur-
considered owned directly or indirectly by ity. The rules in the next two paragraphs apply Amounts at Risk
or for the individual's partner. to any financing incurred after August 3, 1998.
You can also choose to apply these rules to fi- The amount you have at risk in any activity is re-
4. When applying rule (1), (2), or (3), stock nancing you obtained before August 4, 1998. If duced by any losses allowed in previous years
considered owned by a person under rule you do that, you must reduce the amounts at under the at-risk rules. It may also be reduced
(1) is treated as actually owned by that risk as a result of applying these rules to years because of distributions you received from the
person. But, if a person constructively ending before August 4, 1998, to the extent activity, debts changed from recourse to nonre-
owns stock because of rule (2) or (3), they they increase the losses allowed for those course, or the initiation of a stop loss or similar
don’t own the stock for purposes of apply- years. agreement. If the amount at risk is reduced be-
ing either rule (2) or (3) to make another In determining whether qualified nonre- low zero, your previously allowed losses are
person the constructive owner of the same course financing is secured only by real prop- subject to recapture, as explained next.
stock. erty used in the activity of holding real property,
disregard property that’s incidental to the activ-
Effect of government price support pro- ity of holding real property. Also, disregard Recapture Rule
grams. A government target price program or other property if the total gross fair market value If the amount you have at risk in any activity at
other government price support programs for a of that property is less than 10% of the total the end of any tax year is less than zero, you
product that you grow doesn’t, without agree- gross fair market value of all the property secur- must recapture at least part of your previously
ments limiting your costs, reduce the amount ing the financing. allowed losses. You do this by adding to your
you have at risk. For this purpose, treat yourself as owning di- income from the activity for that year the lesser
rectly your proportional share of the assets in of the following amounts.
Effect of increasing amounts at risk in sub- any partnership in which you own, directly or in- The negative at-risk amount (treated as a
sequent years. Any loss that’s allowable in a directly, an equity interest. •
particular year reduces your at-risk investment positive amount); or
(but not below zero) as of the beginning of the Qualified person. A qualified person is a • The total amount of losses deducted in
next tax year and in all succeeding tax years for person who actively and regularly engages in previous tax years beginning after 1978,
that activity. If you have a loss that’s more than the business of lending money. The most com- minus any amounts you previously added
your at-risk amount, the loss disallowed won’t mon example is a bank. to your income from that activity under this
be allowed in later years unless you increase However, none of the following persons can recapture rule.
your at-risk amount. Losses that are suspended be a qualified person. Don’t use the recapture income to reduce
because they’re greater than your investment • A person related to you in one of the ways any net loss from the activity for the tax year. In-
that’s at risk are treated as a deduction for the listed under Related persons, earlier. How- stead, treat the recaptured amount as a deduc-
activity in the following year. Consequently, if ever, a person related to you may be a tion for the activity in the next tax year.
your amount at risk increases in later years, you qualified person if the nonrecourse financ-
may deduct previously suspended losses to the ing is commercially reasonable and on the Pre-1979 activity. If the amount you had at
extent that the increases in your amount at risk same terms as loans involving unrelated risk in an activity at the end of your tax year that
exceed your losses in later years. However, persons. began in 1978 was less than zero, you apply
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the preceding rule for the recapture of losses by Using online tools to help prepare your re- Employers can register to use Business
substituting that negative amount for zero. For turn. Go to IRS.gov/Tools for the following. Services Online. The Social Security Adminis-
example, if your at-risk amount for that tax year • The Earned Income Tax Credit Assistant tration (SSA) offers online service at SSA.gov/
was minus $50, you will recapture losses only (IRS.gov/EITCAssistant) determines if employer for fast, free, and secure online W-2
when your at-risk amount goes below minus you’re eligible for the earned income credit filing options to CPAs, accountants, enrolled
$50. (EIC). agents, and individuals who process Form W-2,
• The Online EIN Application IRS.gov/EIN ( ) Wage and Tax Statement, and Form W-2c,
helps you get an employer identification Corrected Wage and Tax Statement.
How To Get Tax Help number (EIN) at no cost.
• The Tax Withholding Estimator IRS.gov/ ( IRS social media. Go to IRS.gov/SocialMedia
If you have questions about a tax issue; need W4app) makes it easier for you to estimate to see the various social media tools the IRS
help preparing your tax return; or want to down- the federal income tax you want your em- uses to share the latest information on tax
load free publications, forms, or instructions, go ployer to withhold from your paycheck. changes, scam alerts, initiatives, products, and
to IRS.gov to find resources that can help you This is tax withholding. See how your with- services. At the IRS, privacy and security are
right away. holding affects your refund, take-home our highest priority. We use these tools to share
pay, or tax due. public information with you. Don’t post your so-
Preparing and filing your tax return. After • The First-Time Homebuyer Credit Account cial security number (SSN) or other confidential
receiving all your wage and earnings state- Look-up IRS.gov/HomeBuyer ( ) tool pro- information on social media sites. Always pro-
ments (Forms W-2, W-2G, 1099-R, 1099-MISC, vides information on your repayments and tect your identity when using any social net-
1099-NEC, etc.); unemployment compensation account balance. working site.
statements (by mail or in a digital format) or • The Sales Tax Deduction Calculator The following IRS YouTube channels pro-
other government payment statements (Form (IRS.gov/SalesTax) figures the amount you vide short, informative videos on various tax-re-
1099-G); and interest, dividend, and retirement can claim if you itemize deductions on lated topics in English, Spanish, and ASL.
statements from banks and investment firms Schedule A (Form 1040). • Youtube.com/irsvideos.
(Forms 1099), you have several options to • Youtube.com/irsvideosmultilingua.
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You can prepare the tax return yourself, see if tions. On IRS.gov, you can get
you qualify for free tax preparation, or hire a tax up-to-date information on current Watching IRS videos. The IRS Video portal
professional to prepare your return. events and changes in tax law. (IRSVideos.gov) contains video and audio pre-
• IRS.gov/Help: A variety of tools to help you sentations for individuals, small businesses,
Free options for tax preparation. Go to get answers to some of the most common and tax professionals.
IRS.gov to see your options for preparing and tax questions. Online tax information in other languages.
filing your return online or in your local commun- • IRS.gov/ITA: The Interactive Tax Assistant, You can find information on IRS.gov/
ity, if you qualify, which include the following. a tool that will ask you questions and, MyLanguage if English isn’t your native lan-
• Free File. This program lets you prepare based on your input, provide answers on a guage.
and file your federal individual income tax number of tax law topics.
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ble forms. However, state tax preparation the most recent tax changes and interac- lingual customers by offering OPI services. The
may not be available through Free File. Go tive links to help you find answers to your OPI Service is a federally funded program and
to IRS.gov/FreeFile to see if you qualify for questions. is available at Taxpayer Assistance Centers
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and direct deposit or payment options. formation in your electronic filing software. return site. The OPI Service is accessible in
• VITA. The Volunteer Income Tax Assis-
tance (VITA) program offers free tax help more than 350 languages.
to people with low-to-moderate incomes, Need someone to prepare your tax return?
persons with disabilities, and limited-Eng- There are various types of tax return preparers, Accessibility Helpline available for taxpay-
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preparing their own tax returns. Go to countants (CPAs), accountants, and many oth- formation about accessibility services can call
IRS.gov/VITA, download the free IRS2Go ers who don’t have professional credentials. If 833-690-0598. The Accessibility Helpline can
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(TCE) program offers free tax help for all • Primarily responsible for the overall sub- large print, audio, etc.). The Accessibility Help-
taxpayers, particularly those who are 60 stantive accuracy of your return, line does not have access to your IRS account.
years of age and older. TCE volunteers • Required to sign the return, and For help with tax law, refunds, or account-rela-
specialize in answering questions about • Required to include their preparer tax iden- ted issues, go to IRS.gov/LetUsHelp.
pensions and retirement-related issues tification number (PTIN).
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888-227-7669 for information on free tax return, you're ultimately responsible for provid- receive certain types of written correspondence
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• MilTax. Members of the U.S. Armed to accurately prepare your return. Anyone paid • Standard Print.
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partment of Defense through Military One- more information on how to choose a tax pre-
Source. For more information, go to parer, go to Tips for Choosing a Tax Preparer • Audio (MP3).
MilitaryOneSource MilitaryOneSource.mil/ ( on IRS.gov. • Plain Text File (TXT).
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then filed electronically regardless of in- virus, as well as tax relief available for individu- Disasters. Go to Disaster Assistance and
come. als and families, small and large businesses, Emergency Relief for Individuals and
and tax-exempt organizations.

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Businesses to review the available disaster tax fected if your SSN is used to file a fraudu- and faster than mailing in a check or money or-
relief. lent return or to claim a refund or credit. der.
Getting tax forms and publications. Go to • The IRS doesn’t initiate contact with tax-
payers by email, text messages (including What if I can’t pay now? Go to IRS.gov/
IRS.gov/Forms to view, download, or print all shortened links), telephone calls, or social Payments for more information about your op-
the forms, instructions, and publications you media channels to request or verify per- tions.
may need. Or, you can go to IRS.gov/ sonal or financial information. This in- • Apply for an online payment agreement
OrderForms to place an order. cludes requests for personal identification (IRS.gov/OPA) to meet your tax obligation
Getting tax publications and instructions in numbers (PINs), passwords, or similar in- in monthly installments if you can’t pay
eBook format. You can also download and formation for credit cards, banks, or other your taxes in full today. Once you complete
view popular tax publications and instructions financial accounts. the online process, you will receive imme-
(including the Instructions for Form 1040) on • Go to IRS.gov/IdentityTheft, the IRS Iden- diate notification of whether your agree-
mobile devices as eBooks at IRS.gov/eBooks. tity Theft Central webpage, for information ment has been approved.
on identity theft and data security protec- • Use the Offer in Compromise Pre-Qualifier
Note. IRS eBooks have been tested using tion for taxpayers, tax professionals, and to see if you can settle your tax debt for
Apple's iBooks for iPad. Our eBooks haven’t businesses. If your SSN has been lost or less than the full amount you owe. For
been tested on other dedicated eBook readers, stolen or you suspect you’re a victim of more information on the Offer in Compro-
and eBook functionality may not operate as in- tax-related identity theft, you can learn mise program, go to IRS.gov/OIC.
tended. what steps you should take. Filing an amended return. Go to IRS.gov/
• Get an Identity Protection PIN (IP PIN). IP Form1040X for information and updates.
Access your online account (individual tax- PINs are six-digit numbers assigned to tax-
payers only). Go to IRS.gov/Account to se- payers to help prevent the misuse of their Checking the status of your amended re-
curely access information about your federal tax SSNs on fraudulent federal income tax re- turn. Go to IRS.gov/WMAR to track the status
account. turns. When you have an IP PIN, it pre- of Form 1040-X amended returns.
• View the amount you owe and a break- vents someone else from filing a tax return
down by tax year. with your SSN. To learn more, go to Note. It can take up to 3 weeks from the
• See payment plan details or apply for a IRS.gov/IPPIN. date you filed your amended return for it to
new payment plan. show up in our system, and processing it can
• Make a payment or view 5 years of pay- Ways to check on the status of your refund. take up to 16 weeks.
ment history and any pending or sched- • Go to IRS.gov/Refunds.
uled payments. • Download the official IRS2Go app to your Understanding an IRS notice or letter
• Access your tax records, including key mobile device to check your refund status. you’ve received. Go to IRS.gov/Notices to
data from your most recent tax return, and • Call the automated refund hotline at find additional information about responding to
transcripts. 800-829-1954. an IRS notice or letter.
• View digital copies of select notices from
the IRS. Note. The IRS can’t issue refunds before Note. You can use Schedule LEP (Form
• Approve or reject authorization requests mid-February for returns that claimed the EIC or 1040), Request for Change in Language Prefer-
from tax professionals. the additional child tax credit (ACTC). This ap- ence, to state a preference to receive notices,
• View your address on file or manage your plies to the entire refund, not just the portion as- letters, or other written communications from
communication preferences. sociated with these credits. the IRS in an alternative language. You may not
immediately receive written communications in
Tax Pro Account. This tool lets your tax pro- Making a tax payment. Go to IRS.gov/ the requested language. The IRS’s commitment
fessional submit an authorization request to ac- Payments for information on how to make a to LEP taxpayers is part of a multi-year timeline
cess your individual taxpayer IRS online payment using any of the following options. that is scheduled to begin providing translations
account. For more information, go to IRS.gov/ • IRS Direct Pay: Pay your individual tax bill in 2023. You will continue to receive communi-
TaxProAccount. or estimated tax payment directly from cations, including notices and letters in English
your checking or savings account at no until they are translated to your preferred lan-
Using direct deposit. The fastest way to re- cost to you. guage.
ceive a tax refund is to file electronically and • Debit or Credit Card: Choose an approved
choose direct deposit, which securely and elec- payment processor to pay online or by Contacting your local IRS office. Keep in
tronically transfers your refund directly into your phone. mind, many questions can be answered on
financial account. Direct deposit also avoids the • Electronic Funds Withdrawal: Schedule a IRS.gov without visiting an IRS TAC. Go to
possibility that your check could be lost, stolen, payment when filing your federal taxes us- IRS.gov/LetUsHelp for the topics people ask
destroyed, or returned undeliverable to the IRS. ing tax return preparation software or about most. If you still need help, IRS TACs
Eight in 10 taxpayers use direct deposit to re- through a tax professional. provide tax help when a tax issue can’t be han-
ceive their refunds. If you don’t have a bank ac- • Electronic Federal Tax Payment System: dled online or by phone. All TACs now provide
count, go to IRS.gov/DirectDeposit for more in- Best option for businesses. Enrollment is service by appointment, so you’ll know in ad-
formation on where to find a bank or credit required. vance that you can get the service you need
union that can open an account online. • Check or Money Order: Mail your payment without long wait times. Before you visit, go to
to the address listed on the notice or in- IRS.gov/TACLocator to find the nearest TAC
Getting a transcript of your return. The structions. and to check hours, available services, and ap-
quickest way to get a copy of your tax transcript • Cash: You may be able to pay your taxes pointment options. Or, on the IRS2Go app, un-
is to go to IRS.gov/Transcripts. Click on either with cash at a participating retail store. der the Stay Connected tab, choose the Con-
“Get Transcript Online” or “Get Transcript by • Same-Day Wire: You may be able to do tact Us option and click on “Local Offices.”
Mail” to order a free copy of your transcript. If same-day wire from your financial institu-
you prefer, you can order your transcript by call- tion. Contact your financial institution for
ing 800-908-9946. availability, cost, and time frames. The Taxpayer Advocate
Service (TAS) Is Here To
Reporting and resolving your tax-related Note. The IRS uses the latest encryption
identity theft issues. technology to ensure that the electronic pay- Help You
• Tax-related identity theft happens when ments you make online, by phone, or from a What Is TAS?
someone steals your personal information mobile device using the IRS2Go app are safe
to commit tax fraud. Your taxes can be af- and secure. Paying electronically is quick, easy, TAS is an independent organization within the
IRS that helps taxpayers and protects taxpayer
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rights. Their job is to ensure that every taxpayer       •  You face (or your business is facing) an             TAS for Tax Professionals
is  treated  fairly  and  that  you  know  and  under-      immediate threat of adverse action; or
stand  your  rights  under  the Taxpayer  Bill  of       •  You’ve tried repeatedly to contact the IRS           TAS can provide a variety of information for tax 
Rights.                                                     but no one has responded, or the IRS                 professionals,  including  tax  law  updates  and 
                                                            hasn’t responded by the date promised.               guidance, TAS programs, and ways to let TAS 
How Can You Learn About Your                                                                                     know about systemic problems you’ve seen in 
Taxpayer Rights?                                         How Can You Reach TAS?                                  your practice.

The Taxpayer Bill of Rights describes 10 basic           TAS  has  offices in  every  state,  the  District  of  Low Income Taxpayer 
rights that all taxpayers have when dealing with         Columbia,  and  Puerto  Rico.  Your  local  advo-
the  IRS.  Go  to TaxpayerAdvocate.IRS.gov  to           cate’s  number  is  in  your  local  directory  and  at Clinics (LITCs)
help you understand what these rights mean to            TaxpayerAdvocate.IRS.gov/Contact-Us.        You         LITCs  are  independent  from  the  IRS.  LITCs 
you and how they apply. These are your rights.           can also call them at 877-777-4778.                     represent individuals whose income is below a 
Know them. Use them.                                                                                             certain level and need to resolve tax problems 
                                                         How Else Does TAS Help                                  with the IRS, such as audits, appeals, and tax 
What Can TAS Do for You?                                 Taxpayers?                                              collection disputes. In addition, LITCs can pro-
                                                                                                                 vide  information  about  taxpayer  rights  and  re-
TAS  can  help  you  resolve  problems  that  you        TAS works to resolve large-scale problems that          sponsibilities in different languages for individu-
can’t resolve with the IRS. And their service is         affect  many  taxpayers.  If  you  know  of  one  of    als who  speak English as a second  language. 
free. If you qualify for their assistance, you will      these broad issues, report it to them at IRS.gov/       Services are offered for free or a small fee for 
be assigned to one advocate who will work with           SAMS.                                                   eligible taxpayers. To find an LITC near you, go 
you  throughout  the  process  and  will  do  every-                                                             to   TaxpayerAdvocate.IRS.gov/about-us/Low-
thing  possible  to  resolve  your  issue.  TAS  can                                                             Income-Taxpayer-Clinics-LITC or see IRS Pub. 
help you if:                                                                                                     4134, Low Income Taxpayer Clinic List.
 • Your problem is causing financial difficulty 
   for you, your family, or your business;

                       To help us develop a more useful index, please let us know if you have ideas for index entries.
Index                  See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
 
                                   Corporations:                                                                           Recapture rule under at-risk 
A                                     Closely held         6 10,             M                                                 limits 15
                                                                                                                           Recharacterization of passive 
Active participation   14             Controlled group of        14          Material participation              5 6,          income 10
Activity:                             Personal service         6 10,         Modified adjusted gross                       Reductions of amounts at 
  Appropriate economic unit     8     Qualified          14                    income        5                                 risk 15
  Nonpassive      5                                                                                                        Related persons    14
  Trade or business    3           D                                         N                                             Rental activity:
Amounts borrowed       14          Deductions, passive activity            7 Nonrecourse loan        15                        $25,000 offset 4
Amounts not at risk    15          Disabled farmer          6                                                                  Active participation 4
Appropriate economic unit       8  Disclosure requirement            9       P                                                 Exceptions 4
Assistance (See Tax help)          Dispositions:                                                                               Phaseout rule  4
At-risk activities:                   Death          12                      Participation        5                            Real estate professional 6
  Aggregation of    14                Gift 12                                  Active 14                                   Retired farmer    6
  Separation of   14                  Installment sale       12                Material      5
At-risk amounts     14                Partial          9                     Passive activity        2 12,                 S
  Government price support                                                     Disposition        12
      programs    15               E                                           Former 3                                    Section 1245 property     13
  Increasing amounts   15                                                      Grouping      8                             Self-charged interest    6
  Nonrecourse financing   15       Excluded business, definition               Limits 2                                    Separate activity   14
                                      of  14
At-risk limits 13                                                              Material participation            5         Significant participation passive 
  Closely held corporation  13                                                 Rental 3                                        activities 10
  Loss defined    13               F                                           Rules  3 8,                                 Special $25,000 allowance     4
  Partners   13                    Farmer  6                                   Who must use these rules               2    Surviving spouse of farmer    6
  S corporation shareholders    13 Form:                                     Passive activity deductions              7
  Who is affected   13                6198      13                           Passive activity income             7         T
At-risk rules:                        8810      2                            Passive income,                               Tax help   16
  Activities covered by  13        Former passive activity           3         recharacterization of             10        Trade or business activities:
  Exceptions to   13                                                         Publications (See Tax help)                       Definition of 3
  Excluded business    14          G                                         Publicly traded partnership              3 9,     Real property  6
  Qualifying business  14
  Qualified corporation  14        Grouping passive activities             8 Q                                             W
  Recapture rule    15                                                       Qualified person, nonrecourse                 Worksheet A    10 11, 
                                   I
                                                                               financing          15                       Worksheet B    11
B                                  Income, passive activity          7       Qualifying business, at-risk 
                                                                               rules  14
Borrowed amounts       14
                                   L
C                                  Limited entrepreneur          9           R
                                   Limited partners         6                Real estate professional              6
Closely held corporation  13

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