Passive activity is any rental activity or business in which the taxpayer does not materially participate. A limited partner is generally passive due to more restrictive tests for material participation. As a result, limited partners will generally have passive income or losses from the partnership. In addition, passive income does not include salaries, portfolio income, or investment income.
There are two kinds of passive activities:
- Rentals, including both equipment and rental real estate, regardless of the level of the participation unless the taxpayer is a real estate professional.
- Businesses in which the taxpayer does not materially participate on a regular, continuous, and substantial basis.
Income and losses from the following activities would generally be passive:
- Equipment leasing
- Rental real estate (with some exceptions)
- Sole proprietorship or farm in which the taxpayer does not materially participate
- Limited partnerships with some exceptions
- Partnerships, S-Corporations, and limited liability companies in which the taxpayer does not materially participate
- Gain from disposition of property used in a passive activity
- Gain from disposition of an interest in a passive activity
- Self-charged interest (unless the passthrough entity made an election under 26 CFR Sec 1.469-7)
Note: The rules for passive income, loss, deductions, and credits from a publicly traded partnership (PTP) are applied separately from other passive activities. Thus, for example, a loss from a PTP will not be offset against non-PTP passive income.
Nonpassive activities are businesses in which the taxpayer works on a regular, continuous, and substantial basis. Also, salaries, guaranteed payments, 1099 commission income and portfolio or investment income are deemed to be nonpassive. Portfolio income includes interest income, dividends, royalties, gains and losses on stocks, pensions, lottery winnings, and any other property held for investment.
Income and losses from the following activities would generally be nonpassive:
- Salaries, wages, and Form 1099 commission income
- Guaranteed payments
- Interest and dividends
- Stocks and bonds
- Sale of undeveloped land or other investment property
- Annuities and royalties derived in the ordinary course of business
- Sole proprietorship or farm in which the taxpayer materially participates
- Partnerships, S-Corporations, and limited liability companies in which the taxpayer materially participates
- Trusts in which the fiduciary materially participates
- State, local, and foreign income tax refunds
- Covenant not to compete
NOTE: This is a guide on entering passive and nonpassive income into the TaxSlayer Pro program. This is not intended as tax advice.