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1040 Form

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1040 Form

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

  • Encourages you to borrow money or cash in retirement funds to invest;
  • Pressures you to invest immediately;
  • Promises quick profits;
  • Says that the disclosure documents required by Federal law are just a formality;
  • Tells you to write false information on your account form;
  • Sends material with typos or misspellings or not printed on letterhead;
  • Does not send your money promptly;
  • Offers to share inside information; or
  • Uses words like "guarantee","high return","limited offer", or "as safe as a CD".
  • Uses the phrase, "this investment is IRA-approved."
  • Claims that "off-shore investments are tax-free and confidential."

Investing in Gold

Many financial experts recommend buying gold as part of a balanced portfolio. Some suggest buying only a small amount because values can fluctuate; others recommend heavier investments.
There are a number of ways to invest in gold; common ones include bullion, certificates, and coins. Most people depend on an investment advisor or company to help them choose. Make sure the person or company you choose is licensed with your state securities administrator.
Also, be aware that the U.S. Mint's American Eagle Gold Bullion Coins are the only gold coins guaranteed by the U.S. government in terms of purity, weight, and content. They're available from precious metal or collectible coin dealers, certain banks, and brokerage houses. If you're considering investing in gold, do your homework first. Check with the U.S. Mint.
The Federal Trade Commission is another useful source for information on protecting yourself against scam artists touting coins and precious metals as safe investments to hedge against bad economic times.

The 1040 Form

1040 form Internal Revenue Bulletin:  2010-9  March 1, 2010  Rev. 1040 form Proc. 1040 form 2010-18 Table of Contents SECTION 1. 1040 form PURPOSE SECTION 2. 1040 form BACKGROUND SECTION 3. 1040 form SCOPE SECTION 4. 1040 form APPLICATION SECTION 5. 1040 form EFFECTIVE DATE SECTION 6. 1040 form DRAFTING INFORMATION SECTION 1. 1040 form PURPOSE This revenue procedure provides: (1) limitations on depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar year 2010, including a separate table of limitations on depreciation deductions for trucks and vans; and (2) the amounts to be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2010, including a separate table of inclusion amounts for lessees of trucks and vans. 1040 form The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by § 280F(d)(7) of the Internal Revenue Code. 1040 form SECTION 2. 1040 form BACKGROUND . 1040 form 01 For owners of passenger automobiles, § 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. 1040 form Section 280F(d)(7) requires the amounts allowable as depreciation deductions to be increased by a price inflation adjustment amount for passenger automobiles placed in service after 1988. 1040 form The method of calculating this price inflation amount for trucks and vans placed in service in or after calendar year 2003 uses a different CPI “automobile component” (the “new trucks” component) than that used in the price inflation amount calculation for other passenger automobiles (the “new cars” component), resulting in somewhat higher depreciation deductions for trucks and vans. 1040 form This change reflects the higher rate of price inflation for trucks and vans since 1988. 1040 form . 1040 form 02 Section 280F(c) requires a reduction in the deduction allowed to the lessee of a leased passenger automobile. 1040 form The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. 1040 form Under § 1. 1040 form 280F-7(a) of the Income Tax Regulations, this reduction requires a lessee to include in gross income an inclusion amount determined by applying a formula to the amount obtained from a table. 1040 form One table applies to lessees of trucks and vans and another table applies to all other passenger automobiles. 1040 form Each table shows inclusion amounts for a range of fair market values for each taxable year after the passenger automobile is first leased. 1040 form SECTION 3. 1040 form SCOPE . 1040 form 01 The limitations on depreciation deductions in section 4. 1040 form 01(2) of this revenue procedure apply to passenger automobiles (other than leased passenger automobiles) that are placed in service by the taxpayer in calendar year 2010, and continue to apply for each taxable year that the passenger automobile remains in service. 1040 form . 1040 form 02 The tables in section 4. 1040 form 02 of this revenue procedure apply to leased passenger automobiles for which the lease term begins during calendar year 2010. 1040 form Lessees of these passenger automobiles must use these tables to determine the inclusion amount for each taxable year during which the passenger automobile is leased. 1040 form See Rev. 1040 form Proc. 1040 form 2005-13, 2005-1 C. 1040 form B. 1040 form 759, for passenger automobiles first leased before calendar year 2006; Rev. 1040 form Proc. 1040 form 2006-18, 2006-1 C. 1040 form B. 1040 form 645, for passenger automobiles first leased during calendar year 2006; Rev. 1040 form Proc. 1040 form 2007-30, 2007-1 C. 1040 form B. 1040 form 1104, for passenger automobiles first leased during calendar year 2007; Rev. 1040 form Proc. 1040 form 2008-22, 2008-12 I. 1040 form R. 1040 form B. 1040 form 658, for passenger automobiles first leased during calendar year 2008; and Rev. 1040 form Proc. 1040 form 2009-24, 2009-17 I. 1040 form R. 1040 form B. 1040 form 885, for passenger automobiles first leased during calendar year 2009. 1040 form SECTION 4. 1040 form APPLICATION . 1040 form 01 Limitations on Depreciation Deductions for Certain Automobiles. 1040 form (1) Amount of the inflation adjustment. 1040 form (a) Passenger automobiles (other than trucks or vans). 1040 form Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. 1040 form The term “CPI automobile component” is defined in § 280F(d)(7)(B)(ii) as the “automobile component” of the Consumer Price Index for all Urban Consumers published by the Department of Labor. 1040 form The new car component of the CPI was 115. 1040 form 2 for October 1987 and 137. 1040 form 851 for October 2009. 1040 form The October 2009 index exceeded the October 1987 index by 22. 1040 form 651. 1040 form Therefore, the automobile price inflation adjustment for 2010 for passenger automobiles (other than trucks and vans) is 19. 1040 form 66 percent (22. 1040 form 651/115. 1040 form 2 x 100%). 1040 form The dollar limitations in § 280F(a) are multiplied by a factor of 0. 1040 form 1966, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to passenger automobiles (other than trucks and vans) for calendar year 2010. 1040 form This adjustment applies to all passenger automobiles (other than trucks and vans) that are first placed in service in calendar year 2010. 1040 form (b) Trucks and vans. 1040 form To determine the dollar limitations for trucks and vans first placed in service during calendar year 2010, the new truck component of the CPI is used instead of the new car component. 1040 form The new truck component of the CPI was 112. 1040 form 4 for October 1987 and 140. 1040 form 897 for October 2009. 1040 form The October 2009 index exceeded the October 1987 index by 28. 1040 form 497. 1040 form Therefore, the automobile price inflation adjustment for 2010 for trucks and vans is 25. 1040 form 35 percent (28. 1040 form 497/112. 1040 form 4 x 100%). 1040 form The dollar limitations in § 280F(a) are multiplied by a factor of 0. 1040 form 2535, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations for trucks and vans. 1040 form This adjustment applies to all trucks and vans that are first placed in service in calendar year 2010. 1040 form (2) Amount of the limitation. 1040 form Tables 1 and 2 contain the dollar amount of the depreciation limitation for each taxable year for passenger automobiles a taxpayer places in service in calendar year 2010. 1040 form Use Table 1 for a passenger automobile (other than a truck or van) and Table 2 for a truck or van placed in service in calendar year 2010. 1040 form REV. 1040 form PROC. 1040 form 2010-18 TABLE 1 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) PLACED IN SERVICE IN CALENDAR YEAR 2010 Tax Year Amount 1st Tax Year $3,060 2nd Tax Year $4,900 3rd Tax Year $2,950 Each Succeeding Year $1,775 REV. 1040 form PROC. 1040 form 2010-18 TABLE 2 DEPRECIATION LIMITATIONS FOR TRUCKS AND VANS PLACED IN SERVICE IN CALENDAR YEAR 2010 Tax Year Amount 1st Tax Year $3,160 2nd Tax Year $5,100 3rd Tax Year $3,050 Each Succeeding Year $1,875 . 1040 form 02 Inclusions in Income of Lessees of Passenger Automobiles. 1040 form A taxpayer must follow the procedures in § 1. 1040 form 280F-7(a) for determining the inclusion amounts for passenger automobiles first leased in calendar year 2010. 1040 form In applying these procedures, lessees of passenger automobiles other than trucks and vans should use Table 3 of this revenue procedure, while lessees of trucks and vans should use Table 4 of this revenue procedure. 1040 form REV. 1040 form PROC. 1040 form 2010-18 TABLE 3 DOLLAR AMOUNTS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2010 Fair Market Value of Passenger Automobile Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & Later $16,700 $17,000 3 7 10 11 14 17,000 17,500 4 8 13 15 16 17,500 18,000 5 10 16 19 21 18,000 18,500 6 13 18 23 26 18,500 19,000 7 15 22 26 31 19,000 19,500 8 17 25 30 35 19,500 20,000 9 19 29 34 39 20,000 20,500 10 21 32 38 44 20,500 21,000 11 23 35 42 48 21,000 21,500 12 26 38 45 53 21,500 22,000 13 28 41 50 57 22,000 23,000 14 31 46 56 63 23,000 24,000 16 36 52 63 73 24,000 25,000 18 40 59 71 81 25,000 26,000 20 44 66 78 90 26,000 27,000 22 49 71 86 100 27,000 28,000 24 53 78 94 108 28,000 29,000 26 57 85 101 118 29,000 30,000 28 61 92 109 126 30,000 31,000 30 66 97 117 135 31,000 32,000 32 70 104 125 144 32,000 33,000 34 74 111 132 153 33,000 34,000 36 79 117 140 161 34,000 35,000 38 83 123 148 171 35,000 36,000 40 87 130 156 179 36,000 37,000 42 92 136 163 188 37,000 38,000 44 96 143 170 198 38,000 39,000 46 100 149 179 206 39,000 40,000 48 105 155 186 215 40,000 41,000 50 109 162 194 224 41,000 42,000 52 113 169 201 233 42,000 43,000 54 118 174 210 241 43,000 44,000 56 122 181 217 251 44,000 45,000 58 126 188 225 259 45,000 46,000 60 131 194 232 269 46,000 47,000 61 135 201 240 277 47,000 48,000 63 140 207 248 286 48,000 49,000 65 144 213 256 295 49,000 50,000 67 148 220 263 304 50,000 51,000 69 153 226 271 313 51,000 52,000 71 157 232 279 322 52,000 53,000 73 161 239 287 331 53,000 54,000 75 166 245 294 340 54,000 55,000 77 170 252 302 348 55,000 56,000 79 174 258 310 358 56,000 57,000 81 178 265 318 366 57,000 58,000 83 183 271 325 375 58,000 59,000 85 187 278 333 384 59,000 60,000 87 191 284 341 393 60,000 62,000 90 198 294 352 406 62,000 64,000 94 207 306 368 424 64,000 66,000 98 215 320 382 443 66,000 68,000 102 224 332 398 460 68,000 70,000 106 232 346 413 478 70,000 72,000 110 241 358 429 496 72,000 74,000 114 250 371 444 513 74,000 76,000 118 258 384 460 531 76,000 78,000 122 267 396 476 549 78,000 80,000 126 276 409 491 566 80,000 85,000 132 291 432 518 598 85,000 90,000 142 313 464 556 643 90,000 95,000 152 334 497 594 687 95,000 100,000 162 356 528 634 731 100,000 110,000 177 388 577 691 798 110,000 120,000 196 432 641 768 887 120,000 130,000 216 475 705 846 976 130,000 140,000 236 518 770 922 1,065 140,000 150,000 256 561 834 1,000 1,154 150,000 160,000 275 605 898 1,077 1,243 160,000 170,000 295 648 963 1,153 1,333 170,000 180,000 315 691 1,027 1,231 1,421 180,000 190,000 334 735 1,091 1,308 1,510 190,000 200,000 354 778 1,155 1,386 1,599 200,000 210,000 374 821 1,220 1,462 1,688 210,000 220,000 393 865 1,284 1,539 1,777 220,000 230,000 413 908 1,348 1,617 1,866 230,000 240,000 433 951 1,413 1,693 1,956 240,000 and up 453 995 1,476 1,771 2,044 REV. 1040 form PROC. 1040 form 2010-18 TABLE 4 DOLLAR AMOUNTS FOR TRUCKS AND VANS WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2010 Fair Market Value of Passenger Automobile Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & Later 17,000 17,500 3 6 9 10 11 17,500 18,000 4 8 12 14 16 18,000 18,500 5 10 15 18 21 18,500 19,000 6 12 19 22 24 19,000 19,500 7 15 21 26 29 19,500 20,000 8 17 25 29 34 20,000 20,500 9 19 28 33 38 20,500 21,000 10 21 31 37 43 21,000 21,500 11 23 35 41 47 21,500 22,000 12 25 38 45 51 22,000 23,000 13 29 42 51 58 23,000 24,000 15 33 49 58 67 24,000 25,000 17 37 56 66 76 25,000 26,000 19 42 62 73 85 26,000 27,000 21 46 68 82 93 27,000 28,000 23 50 75 89 103 28,000 29,000 25 55 81 97 111 29,000 30,000 27 59 88 104 121 30,000 31,000 29 63 94 113 129 31,000 32,000 31 68 100 120 138 32,000 33,000 33 72 107 127 148 33,000 34,000 35 76 114 135 156 34,000 35,000 37 81 119 143 165 35,000 36,000 39 85 126 151 174 36,000 37,000 41 89 133 158 183 37,000 38,000 43 94 139 166 191 38,000 39,000 45 98 145 174 201 39,000 40,000 47 102 152 182 209 40,000 41,000 49 106 159 189 218 41,000 42,000 51 111 164 198 227 42,000 43,000 53 115 171 205 236 43,000 44,000 55 119 178 213 245 44,000 45,000 57 124 184 220 254 45,000 46,000 59 128 190 228 263 46,000 47,000 60 133 197 235 272 47,000 48,000 62 137 203 244 280 48,000 49,000 64 142 209 251 290 49,000 50,000 66 146 216 259 298 50,000 51,000 68 150 223 266 308 51,000 52,000 70 154 229 275 316 52,000 53,000 72 159 235 282 325 53,000 54,000 74 163 242 290 334 54,000 55,000 76 167 249 297 343 55,000 56,000 78 172 254 305 352 56,000 57,000 80 176 261 313 361 57,000 58,000 82 180 268 320 370 58,000 59,000 84 185 274 328 378 59,000 60,000 86 189 280 336 388 60,000 62,000 89 195 291 347 401 62,000 64,000 93 204 303 363 418 64,000 66,000 97 213 315 379 436 66,000 68,000 101 221 329 394 454 68,000 70,000 105 230 341 410 472 70,000 72,000 109 239 354 424 490 72,000 74,000 113 247 367 440 508 74,000 76,000 117 256 380 455 526 76,000 78,000 121 264 393 471 543 78,000 80,000 125 273 406 486 561 80,000 85,000 131 289 428 513 592 85,000 90,000 141 310 461 552 636 90,000 95,000 151 332 492 591 681 95,000 100,000 161 353 525 629 726 100,000 110,000 176 386 573 686 793 110,000 120,000 195 430 637 763 882 120,000 130,000 215 473 701 841 971 130,000 140,000 235 516 766 918 1,059 140,000 150,000 255 559 830 995 1,149 150,000 160,000 274 603 894 1,072 1,238 160,000 170,000 294 646 958 1,150 1,326 170,000 180,000 314 689 1,023 1,226 1,416 180,000 190,000 333 733 1,087 1,303 1,505 190,000 200,000 353 776 1,151 1,381 1,594 200,000 210,000 373 819 1,216 1,457 1,683 210,000 220,000 392 863 1,280 1,534 1,772 220,000 230,000 412 906 1,344 1,612 1,861 230,000 240,000 432 949 1,409 1,689 1,949 240,000 and up 452 992 1,473 1,766 2,039 SECTION 5. 1040 form EFFECTIVE DATE This revenue procedure applies to passenger automobiles that a taxpayer first places in service or first leases during calendar year 2010. 1040 form SECTION 6. 1040 form DRAFTING INFORMATION The principal author of this revenue procedure is Bernard P. 1040 form Harvey of the Office of Associate Chief Counsel (Income Tax & Accounting). 1040 form For further information regarding this revenue procedure, contact Mr. 1040 form Harvey at (202) 622-4930 (not a toll-free call). 1040 form Prev  Up  Next   Home   More Internal Revenue Bulletins