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Hr block com 10. Hr block com   Retirement Savings Contributions Credit (Saver's Credit) Table of Contents Full-time student. Hr block com Adjusted gross income. Hr block com Distributions received by spouse. Hr block com Testing period. Hr block com If you or your employer make eligible contributions (defined later) to a retirement plan, you may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). Hr block com This credit could reduce the federal income tax you pay dollar for dollar. Hr block com Can you claim the credit?   If you or your employer make eligible contributions to a retirement plan, you can claim the credit if all of the following apply. Hr block com You are not under age 18. Hr block com You are not a full-time student (explained next). Hr block com No one else, such as your parent(s), claims an exemption for you on their tax return. Hr block com Your adjusted gross income (defined later) is not more than: $59,000 for 2013 ($60,000 for 2014) if your filing status is married filing jointly, $44,250 for 2013 ($45,000 for 2014) if your filing status is head of household (with qualifying person), or $29,500 for 2013 ($30,000 for 2014) if your filing status is single, married filing separately, or qualifying widow(er) with dependent child. Hr block com Full-time student. Hr block com   You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government. Hr block com You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full-time. Hr block com Adjusted gross income. Hr block com   This is generally the amount on line 38 of your 2013 Form 1040 or line 22 of your 2013 Form 1040A. Hr block com However, you must add to that amount any exclusion or deduction claimed for the year for: Foreign earned income, Foreign housing costs, Income for bona fide residents of American Samoa, and Income from Puerto Rico. Hr block com Eligible contributions. Hr block com   These include: Contributions to a traditional or Roth IRA, Elective deferrals, including amounts designated as after-tax Roth contributions, to: A 401(k) plan (including a SIMPLE 401(k)), A section 403(b) annuity, An eligible deferred compensation plan of a state or local government (a governmental 457 plan), A SIMPLE IRA plan, or A salary reduction SEP, and Contributions to a section 501(c)(18) plan. Hr block com They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or a section 403(b) annuity. Hr block com For purposes of the credit, an employee contribution will be voluntary as long as it is not required as a condition of employment. Hr block com Reducing eligible contributions. Hr block com   Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included earlier under Eligible contributions. Hr block com Also reduce your eligible contributions by any distribution from a Roth IRA that is not rolled over, even if the distribution is not taxable. Hr block com      Do not reduce your eligible contributions by any of the following: The portion of any distribution which is not includible in income because it is a trustee-to-trustee transfer or a rollover distribution. Hr block com Any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if: The distribution is made before the due date (including extensions) of your tax return for that year, You do not take a deduction for the contribution, and The distribution includes any income attributable to the contribution. Hr block com Loans from a qualified employer plan treated as a distribution. Hr block com Distributions of excess contributions or deferrals (and income attributable to excess contributions and deferrals). Hr block com Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k). Hr block com Distributions from an eligible retirement plan that are converted or rolled over to a Roth IRA. Hr block com Distributions from a military retirement plan. Hr block com Distributions received by spouse. Hr block com   Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit. Hr block com Testing period. Hr block com   The testing period consists of: The year in which you claim the credit, The 2 years before the year in which you claim the credit, and The period after the end of the year in which you claim the credit and before the due date of the return (including extensions) for filing your return for the year in which you claimed the credit. Hr block com Example. Hr block com You and your spouse filed joint returns in 2011 and 2012, and plan to do so in 2013 and 2014. Hr block com You received a taxable distribution from a qualified plan in 2011 and a taxable distribution from an eligible section 457(b) deferred compensation plan in 2012. Hr block com Your spouse received taxable distributions from a Roth IRA in 2013 and tax-free distributions from a Roth IRA in 2014 before April 15. Hr block com You made eligible contributions to an IRA in 2013 and you otherwise qualify for this credit. Hr block com You must reduce the amount of your qualifying contributions in 2013 by the total of the distributions you and your spouse received in 2011, 2012, 2013, and 2014. Hr block com Maximum eligible contributions. Hr block com   After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person. Hr block com Effect on other credits. Hr block com   The amount of this credit will not change the amount of your refundable tax credits. Hr block com A refundable tax credit, such as the earned income credit or the additional child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes. Hr block com Maximum credit. Hr block com   This is a nonrefundable credit. Hr block com The amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. Hr block com If your tax liability is reduced to zero because of other nonrefundable credits, such as the education credits, then you will not be entitled to this credit. Hr block com How to figure and report the credit. Hr block com   The amount of the credit you can get is based on the contributions you make and your credit rate. Hr block com The credit rate can be as low as 10% or as high as 50%. Hr block com Your credit rate depends on your income and your filing status. Hr block com See Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your credit rate. Hr block com   The maximum contribution taken into account is $2,000 per person. Hr block com On a joint return, up to $2,000 is taken into account for each spouse. Hr block com   Figure the credit on Form 8880. Hr block com Report the credit on line 50 of your Form 1040 or line 32 of your Form 1040A, and attach Form 8880 to your return. Hr block com Prev  Up  Next   Home   More Online Publications

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How to Make an Offshore Voluntary Disclosure

The Offshore Voluntary Disclosure Program is offered to those taxpayers with undisclosed offshore accounts or assets. Please follow the process outlined below. You should refer to How to Make a Domestic Voluntary Disclosure if the undisclosed accounts are domestic in nature.

Pre-Clearance:

Taxpayers or representatives may fax to the IRS Criminal Investigation Lead Development Center at (267) 941-1115 the taxpayers' name, date of birth, social security number and address (if the taxpayer is represented by a tax professional, an executed power of attorney must be included).  

IRS Criminal Investigation will then notify taxpayers or their representatives via fax whether or not they have been cleared to make a voluntary disclosure using the Offshore Voluntary Disclosures Letter. Taxpayers or representatives with questions regarding the pre-clearance can call (267) 941-1607 or contact their nearest Criminal Investigation Office.

Note: Pre-clearance does not guarantee a taxpayer acceptance into the Offshore Voluntary Disclosure Program.    

Offshore Voluntary Disclosure Letter

If the taxpayer chooses to submit a pre-clearance request, after the taxpayer receives a pre-clearance notification, the taxpayer will have 30 days from receipt of the fax notification to complete the Offshore Voluntary Disclosure Letter and attachment (under documents). If the taxpayer chooses to bypass the pre-clearance process, the taxpayer must mail the Offshore Voluntary Disclosures Letter to the following address: 


Internal Revenue Service 
Criminal Investigation
ATTN:  Offshore Voluntary Disclosure Coordinator
Philadelphia Lead Development Center
1-D04-100
2970 Market Street
Philadelphia, PA 19104

The IRS will review the offshore Voluntary Disclosures Letters and notify the taxpayer or representative by mail whether the voluntary disclosure has been preliminarily accepted or declined. 

Complete Voluntary Disclosure Package

Once the voluntary disclosure has been preliminarily accepted, the taxpayer should send the full voluntary disclosure package to:

Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX  78741
ATTN: 2011 Offshore Voluntary Disclosure Initiative

Opt Out Procedure

Taxpayers may request to opt out of the civil settlement structure of the 2009 Offshore Voluntary Disclosure Program or 2011 Offshore Voluntary Disclosure Initiative.  For specific information on the opt out process, see questions 51.1 through 51.3 under the 2011 OVDI Frequently Asked Questions and Answers.

Tax administration questions such as Where's My Refund or Where Do I File can be addressed by other IRS offices

 


Frequently Asked Questions (FAQs)

IRS Criminal Investigation Home Page

Page Last Reviewed or Updated: 24-Mar-2014

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Hr block com 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. Hr block com Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Hr block com 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. Hr block com 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. Hr block com See Passive Activity Deductions, later. Hr block com Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Hr block com However, there is a special allowance under which some or all of your passive activity loss may be allowed. Hr block com See Special $25,000 allowance , later. Hr block com Definition of passive activity loss. Hr block com    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Hr block com See Passive Activity Income and Deductions , later. Hr block com   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. Hr block com For details on net active income, see the Instructions for Form 8810. Hr block com For the definition of passive activity gross income, see Passive Activity Income , later. Hr block com For the definition of passive activity deductions, see Passive Activity Deductions , later. Hr block com 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. Hr block com Allocation of disallowed passive activity loss among activities. Hr block com   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. Hr block com 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. Hr block com Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Hr block com Loss from an activity. Hr block com   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. Hr block com   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. Hr block com See Significant Participation Passive Activities , later. Hr block com Example. Hr block com John Pine holds interests in three passive activities, A, B, and C. Hr block com 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. Hr block com Therefore, a ratable portion of the losses from activities A and B is disallowed. Hr block com 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. Hr block com   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. Hr block com 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. Hr block com Excluded deductions. Hr block com    “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. Hr block com See Recharacterization of Passive Income , later. Hr block com Separately identified deductions. Hr block com   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. Hr block com   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Hr block com   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Hr block com Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Hr block com See Active participation , later. Hr block com Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Hr block com See Active participation , later. Hr block com Losses from sales or exchanges of capital assets. Hr block com Section 1231 losses. Hr block com See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Hr block com 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. Hr block com 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. Hr block com For more information, see Regulations section 1. Hr block com 469-1(f)(4). Hr block com Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Hr block com 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. Hr block com Credits that are included in figuring the general business credit are subject to the passive activity rules. Hr block com See the Instructions for Form 8582-CR for more information. Hr block com 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). Hr block com You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Hr block com You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Hr block com Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Hr block com This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Hr block com 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. Hr block com 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. Hr block com These rules do not apply to C corporations. Hr block com For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Hr block com Passive Activities There are two kinds of passive activities. Hr block com Trade or business activities in which you do not materially participate during the year. Hr block com Rental activities, even if you do materially participate in them, unless you are a real estate professional. Hr block com Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Hr block com Treatment of former passive activities. Hr block com   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. Hr block com 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. Hr block com Treat any remaining prior year unallowed loss like you treat any other passive loss. Hr block com   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Hr block com 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. Hr block com 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). Hr block com 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). Hr block com 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. Hr block com You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Hr block com 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. Hr block com See Real Estate Professional under Activities That Are Not Passive Activities, later. Hr block com 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. Hr block com It does not matter whether the use is under a lease, a service contract, or some other arrangement. Hr block com Exceptions. Hr block com   Your activity is not a rental activity if any of the following apply. Hr block com The average period of customer use of the property is 7 days or less. Hr block com 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. Hr block com If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Hr block com 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. Hr block com The activity's average period of customer use will equal the sum of the amounts for each class. Hr block com 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. Hr block com Significant personal services include only services performed by individuals. Hr block com 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. Hr block com Significant personal services do not include the following. Hr block com 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. Hr block com You provide extraordinary personal services in making the rental property available for customer use. Hr block com 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. Hr block com The rental is incidental to a nonrental activity. Hr block com 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. Hr block com The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Hr block com The rental of property is incidental to a trade or business activity if all of the following apply. Hr block com You own an interest in the trade or business activity during the year. Hr block com 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. Hr block com Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Hr block com 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. Hr block com You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Hr block com 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. Hr block com    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. Hr block com Special $25,000 allowance. Hr block com   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. Hr block com This special allowance is an exception to the general rule disallowing the passive activity loss. Hr block com 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. Hr block com   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. Hr block com 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. Hr block com   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Hr block com See Phaseout rule , later. Hr block com Example. Hr block com 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. Hr block com She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Hr block com 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). Hr block com Commercial revitalization deduction (CRD). Hr block com   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Hr block com 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. Hr block com You cannot claim a CRD for a building placed in service after December 31, 2009. Hr block com Active participation. Hr block com   Active participation is not the same as material participation (defined later). Hr block com Active participation is a less stringent standard than material participation. Hr block com For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Hr block com Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Hr block com   Only individuals can actively participate in rental real estate activities. Hr block com 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. Hr block com   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. Hr block com 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. Hr block com   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Hr block com   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Hr block com   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. Hr block com   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Hr block com Example. Hr block com 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. Hr block com He advertised and rented the house to the current tenant himself. Hr block com He also collected the rents and did the repairs or hired someone to do them. Hr block com 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. Hr block com Phaseout rule. Hr block com   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). Hr block com 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. Hr block com    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Hr block com Taxable social security and tier 1 railroad retirement benefits. Hr block com Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Hr block com The exclusion from income of interest from qualified U. Hr block com S. Hr block com savings bonds used to pay qualified higher education expenses. Hr block com The exclusion from income of amounts received from an employer's adoption assistance program. Hr block com Passive activity income or loss included on Form 8582. Hr block com 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). Hr block com Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Hr block com The deduction for the employer-equivalent portion of self-employment tax. Hr block com The deduction for domestic production activities. Hr block com The deduction allowed for interest on student loans. Hr block com The deduction for qualified tuition and related expenses. Hr block com Example. Hr block com During 2013, John was unmarried and was not a real estate professional. Hr block com For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Hr block com His modified adjusted gross income is $120,000. Hr block com When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Hr block com He must carry over the remaining $16,000 passive activity loss to 2014. Hr block com 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. Hr block com   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Hr block com 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). Hr block com   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Hr block com Ordering rules. Hr block com   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. Hr block com The portion of passive activity losses not attributable to the CRD. Hr block com The portion of passive activity losses attributable to the CRD. Hr block com The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Hr block com The portion of passive activity credits attributable to the rehabilitation credit. Hr block com The portion of passive activity credits attributable to the low-income housing credit. Hr block com Activities That Are Not Passive Activities The following are not passive activities. Hr block com Trade or business activities in which you materially participated for the tax year. Hr block com 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). Hr block com It does not matter whether you materially participated in the activity for the tax year. Hr block com 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. Hr block com  See Temporary Regulations section 1. Hr block com 469-1T(e)(4)(ii). Hr block com 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. Hr block com An activity of trading personal property for the account of those who own interests in the activity. Hr block com See Temporary Regulations section 1. Hr block com 469-1T(e)(6). Hr block com Rental real estate activities in which you materially participated as a real estate professional. Hr block com See Real Estate Professional , later. Hr block com You should not enter income and losses from these activities on Form 8582. Hr block com Instead, enter them on the forms or schedules you would normally use. Hr block com Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Hr block com Material participation tests. Hr block com    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Hr block com You participated in the activity for more than 500 hours. Hr block com 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. Hr block com 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. Hr block com The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Hr block com 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. Hr block com See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Hr block com You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Hr block com The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Hr block com 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. Hr block com Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Hr block com   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. Hr block com 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). Hr block com Participation. Hr block com   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Hr block com Work not usually performed by owners. Hr block com   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. Hr block com The work is not work that is customarily done by the owner of that type of activity. Hr block com 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. Hr block com Participation as an investor. Hr block com   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. Hr block com 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. Hr block com Spouse's participation. Hr block com   Your participation in an activity includes your spouse's participation. Hr block com 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. Hr block com Proof of participation. Hr block com You can use any reasonable method to prove your participation in an activity for the year. Hr block com You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Hr block com 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. Hr block com Limited partners. Hr block com   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Hr block com 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. Hr block com   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). Hr block com Retired or disabled farmer and surviving spouse of a farmer. Hr block com   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. Hr block com 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. Hr block com Corporations. Hr block com   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. Hr block com   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. Hr block com See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Hr block com Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Hr block com However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Hr block com 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. Hr block com See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Hr block com 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). Hr block com 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. Hr block com Qualifications. Hr block com   You qualified as a real estate professional for the year if you met both of the following requirements. Hr block com 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. Hr block com You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Hr block com   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. Hr block com 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. Hr block com   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Hr block com However, you can count your spouse's participation in an activity in determining if you materially participated. Hr block com Real property trades or businesses. Hr block com   A real property trade or business is a trade or business that does any of the following with real property. Hr block com Develops or redevelops it. Hr block com Constructs or reconstructs it. Hr block com Acquires it. Hr block com Converts it. Hr block com Rents or leases it. Hr block com Operates or manages it. Hr block com Brokers it. Hr block com Closely held corporations. Hr block com   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. Hr block com 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. Hr block com Self-charged interest. Hr block com   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. Hr block com   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. Hr block com This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Hr block com   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. Hr block com    Exception. Hr block com 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. Hr block com 469-7(g) to avoid the application of these rules. Hr block com For more details on the self-charged interest rules, see Regulations section 1. Hr block com 469-7. Hr block com 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. Hr block com Passive activity income does not include the following items. Hr block com Income from an activity that is not a passive activity. Hr block com These activities are discussed under Activities That Are Not Passive Activities , earlier. Hr block com Portfolio income. Hr block com This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Hr block com It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Hr block com The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Hr block com For more information on self-charged interest, see Self-charged interest , earlier. Hr block com Personal service income. Hr block com 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. Hr block com Income from positive section 481 adjustments allocated to activities other than passive activities. Hr block com (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Hr block com ) Income or gain from investments of working capital. Hr block com 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. Hr block com 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. Hr block com 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. Hr block com Any other income that must be treated as nonpassive income. Hr block com See Recharacterization of Passive Income , later. Hr block com Overall gain from any interest in a publicly traded partnership. Hr block com See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Hr block com State, local, and foreign income tax refunds. Hr block com Income from a covenant not to compete. Hr block com 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. Hr block com Alaska Permanent Fund dividends. Hr block com 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. Hr block com See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Hr block com Disposition of property interests. Hr block com   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. Hr block com 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. Hr block com An exception to this general rule may apply if you previously used the property in a different activity. Hr block com Exception for more than one use in the preceding 12 months. Hr block com   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. Hr block com Any gain allocated to a passive activity is passive activity income. Hr block com   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. Hr block com Exception for substantially appreciated property. Hr block com   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. Hr block com You used the property in a passive activity for 20% of the time you held your interest in the property. Hr block com You used the property in a passive activity for the entire 24-month period before its disposition. Hr block com If neither condition applies, the gain is not passive activity income. Hr block com 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. Hr block com   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. Hr block com Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Hr block com   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. Hr block com Disposition of property converted to inventory. Hr block com   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. Hr block com 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. Hr block com This rule applies only if you meet all of the following conditions. Hr block com 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). Hr block com 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. Hr block com 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. Hr block com 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. Hr block com 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. Hr block com See Coordination with other limitations on deductions that apply before the passive activity rules , later. Hr block com 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. Hr block com Exceptions. Hr block com   Passive activity deductions do not include the following items. Hr block com Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Hr block com Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Hr block com For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Hr block com Losses from dispositions of property that produce portfolio income or property held for investment. Hr block com State, local, and foreign income taxes. Hr block com Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Hr block com Charitable contribution deductions. Hr block com Net operating loss deductions. Hr block com Percentage depletion carryovers for oil and gas wells. Hr block com Capital loss carrybacks and carryovers. Hr block com Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Hr block com See Coordination with other limitations on deductions that apply before the passive activity rules , later. Hr block com Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Hr block com Net negative section 481 adjustments allocated to activities other than passive activities. Hr block com (Section 481 adjustments are adjustments required due to changes in accounting methods. Hr block com ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Hr block com The deduction for the employer-equivalent portion of self-employment tax. Hr block com Coordination with other limitations on deductions that apply before the passive activity rules. Hr block com   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. Hr block com 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. Hr block com Proration of deductions disallowed under basis limitations. Hr block com   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. Hr block com 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. Hr block com   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. Hr block com 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. Hr block com Proration of deductions disallowed under at-risk limitation. Hr block com   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. Hr block com 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. Hr block com Coordination of basis and at-risk limitations. Hr block com   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. Hr block com Separately identified items of deduction and loss. Hr block com   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. Hr block com   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. Hr block com See Grouping Your Activities , later. Hr block com 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). Hr block com See Section 1231 Gains and Losses in Publication 544 for more information. Hr block com Are attributable to pre-enactment interests in activities. Hr block com See Regulations section 1. Hr block com 469-11T(c). Hr block com 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. Hr block com Grouping is important for a number of reasons. Hr block com If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Hr block com But if the two activities are separate, you must show material participation in each one. Hr block com 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. Hr block com 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. Hr block com Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Hr block com Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Hr block com You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Hr block com The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Hr block com All of the factors do not have to apply to treat more than one activity as a single activity. Hr block com 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. Hr block com Example 1. Hr block com John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Hr block com Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Hr block com 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. Hr block com Example 2. Hr block com Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Hr block com Betty is also a partner in DEF (a trucking business). Hr block com ABC and DEF are under common control. Hr block com The main part of DEF's business is transporting goods for ABC. Hr block com DEF is the only trucking business in which Betty is involved. Hr block com Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Hr block com Consistency and disclosure requirement. Hr block com   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Hr block com 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. Hr block com   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. Hr block com   See Disclosure Requirement , later. Hr block com Regrouping by the IRS. Hr block com   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. Hr block com Rental activities. Hr block com   In general, you cannot group a rental activity with a trade or business activity. Hr block com 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. Hr block com Example. Hr block com Herbert and Wilma are married and file a joint return. Hr block com Healthy Food, an S corporation, is a grocery store business. Hr block com Herbert is Healthy Food's only shareholder. Hr block com Plum Tower, an S corporation, owns and rents out the building. Hr block com Wilma is Plum Tower's only shareholder. Hr block com Plum Tower rents part of its building to Healthy Food. Hr block com Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Hr block com Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Hr block com The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Hr block com 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. Hr block com Grouping of real and personal property rentals. Hr block com   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. Hr block com 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. Hr block com Certain activities may not be grouped. Hr block com   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. Hr block com Holding, producing, or distributing motion picture films or video tapes. Hr block com Farming. Hr block com Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Hr block com For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Hr block com Exploring for, or exploiting, oil and gas resources. Hr block com Exploring for, or exploiting, geothermal deposits. Hr block com   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. Hr block com Limited entrepreneur. Hr block com   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. Hr block com Activities conducted through another entity. Hr block com   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Hr block com 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. Hr block com    You may not treat activities grouped together by the entity as separate activities. Hr block com Personal service and closely held corporations. Hr block com   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. Hr block com See Material Participation , earlier, and Significant Participation Passive Activities , later. Hr block com Publicly traded partnership (PTP). Hr block com   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Hr block com Partial dispositions. Hr block com   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Hr block com 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. Hr block com Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Hr block com You are required to report certain changes to your groupings that occur during the tax year to the IRS. Hr block com If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Hr block com 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. Hr block com If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Hr block com New grouping. Hr block com   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. Hr block com The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Hr block com 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. Hr block com Addition to an existing grouping. Hr block com   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. Hr block com 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. Hr block com 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. Hr block com Regrouping. Hr block com   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Hr block com The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Hr block com 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. Hr block com In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Hr block com Groupings by partnerships and S corporations. Hr block com   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Hr block com Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Hr block com S. Hr block com Return of Partnership Income, or Form 1120S, U. Hr block com S. Hr block com Income Tax Return for an S Corporation, whichever is applicable. Hr block com   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. Hr block com   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Hr block com Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Hr block com 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. Hr block com 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. Hr block com 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). Hr block com 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. Hr block com Instead, enter income or losses on the form and schedules you normally use. Hr block com 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. Hr block com Limit on recharacterized passive income. Hr block com   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. Hr block com Investment income and investment expense. Hr block com   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. Hr block com 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. Hr block com 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. Hr block com Corporations. Hr block com   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. Hr block com The corporation is not treated as materially participating in the activity for the year. Hr block com 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. Hr block com Worksheet A. Hr block com   Complete Worksheet A. Hr block com Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Hr block com Begin by entering the name of each activity in the left column. Hr block com Column (a). Hr block com   Enter the number of hours you participated in each activity and total the column. Hr block com   If the total is more than 500, do not complete Worksheet A or B. Hr block com None of the activities are passive activities because you satisfy test 4 for material participation. Hr block com (See Material participation tests , earlier. Hr block com ) Report all the income and losses from these activities on the forms and schedules you normally use. Hr block com Do not include the income and losses on Form 8582. Hr block com Column (b). Hr block com   Enter the net loss, if any, from the activity. Hr block com 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). Hr block com Enter -0- here if the prior year unallowed loss is the same as the current year net income. Hr block com Column (c). Hr block com   Enter net income (if any) from the activity. Hr block com Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Hr block com Column (d). Hr block com   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). Hr block com If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Hr block com Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88