Instructions For Form Ftb 3801-Cr - Passive Activity Credit Limitations

2005 Instructions for Form FTB 3801-CR

Passive Activity Credit Limitations

These instructions are based on the Internal Revenue Code (IRC) as of January 1, 2005, and the California Revenue and Taxation Code (R&TC).

General Information

computation whether you were always a

taxable year and, if so, how much of the credit is

nonresident or a former resident who moved out

allowed for the current year. The amount of the

In general, California law conforms to the

of California.

credit that is unallowed is carried forward.

Internal Revenue Code (IRC) as of January 2005.

Part-Year Resident

B Special Note

However, there are continuing differences

California taxes residents as if they were

between California and federal law. When

Generally, California law is the same as federal

residents for all prior years. Therefore, a

California conforms to federal tax law changes,

law concerning passive activity credit limita-

nonresident who becomes a resident must

we do not always adopt all of the changes made

tions. Get federal Form 8582-CR, Passive

restate all prior year items using the total taxable

at the federal level. For more information

Activity Credit Limitations, for definitions.

income for all prior years.

regarding California and federal law, visit our

Personal service corporations and closely held

Renewal Communities

Website at and search for

corporations subject to the passive activity rules

California law does not conform to the tax

conformity. Additional information can be found

must use form FTB 3802, Corporate Passive

incentives related to “renewal communities.”

in FTB Pub. 1001, Supplemental Guidelines to

Activity Loss and Credit Limitations, instead of

California law does provide a variety of

California Adjustments , the instructions for

form FTB 3801, Passive Activity Loss Limita-

independent, state-only economic development

California Schedule CA (540 or 540NR), and the

tions, and form FTB 3801-CR.

area tax incentives to encourage revitalization of

Business Entity tax booklets.

special designated areas. The Government Code

S Corporations

Note, the instructions provided with California

provides for the designation of enterprise zones,

The passive activity loss (PAL) rules apply as if

tax forms are a summary of California tax law

Local Agency Military Base Recovery Areas

the S corporation was an individual. This means

and are only intended to aid taxpayers in

(LAMBRAs), a Targeted Tax Area (TTA), and

that losses from passive activities may not be

preparing their state income tax returns. We

Manufacturing Enhancement Areas (MEAs).

used to offset nonpassive income, except for

include information that is most useful to the

California law does not provide for a lower

$25,000 in losses from rental real estate

greatest number of taxpayers in the limited

capital gains rate in any situation. California law

activities. See IRC Section 469(i). However, the

space available. It is not possible to include all

generally conforms to the federal rules for

material participation rules apply as if the

requirements of the California Revenue and

expensing IRC Section 179 property with the

S corporation was a closely held corporation.

Taxation Code (R&TC) in the tax booklets.

exception that California law allows a maximum

The material participation rules for closely held

Taxpayers should not consider the tax booklets

deduction of $25,000. In lieu of this deduction,

corporations are explained in the instructions for

as authoritative law.

the California Personal Income Tax law allows a

federal Form 8810, Corporate Passive Activity

For taxable years beginning on or after

taxpayer with a business in an “Economic

Loss and Credit Limitations. See

January 1, 2002, California law was changed to

Development Area” to elect to expense $20,000

IRC Section 469(h)(4) and the related

clarify the method used to calculate loss

to $40,000 (depending on the designation) of

regulations for more information.

carryovers, deferred deductions, and deferred

certain specified equipment used in the

To compute your California passive activity

income for nonresident and part-year resident

business.

credit limitations for S corporations, use the

taxpayers. This law changed the tax computation

Expense treatment for small business, IRC

worksheets in the instructions for federal

to recognize those items, and established a new

Section 179(b)(1): California law generally

Form 8582-CR using California amounts. Enter

method to determine percentages for computing

conforms to the federal rules for expensing IRC

the amount from line 21 of Form 100S,

tax for all nonresidents and part-year residents.

Section 179 property with the exception that

California S Corporation Franchise or Income

The nonresident tax forms (Long and Short

California law allows a maximum deduction of

Tax Return, on line 10 and line 22 of form

Form 540NR) have been revised to more clearly

$25,000.

FTB 3801-CR in place of the federal modified

show that nonresidents pay tax to California only

The following may affect the computation of

adjusted gross income.

on their California taxable income.

your passive activity credit limitations:

For further information get FTB Pub. 1100,

C Who Must File

Passive loss rules, IRC Section 469(c)(7):

Taxation of Nonresidents and Individuals Who

Form FTB 3801-CR is filed by individuals,

Beginning in 1994, and for federal purposes

Change Residency .

estates, trusts, and S corporations with any of

only, rental real estate activities of taxpayers

Military Personnel – Servicemembers domiciled

the following credits from passive activities:

engaged in a real property business are not

outside of California, and their spouses, may

automatically treated as a passive activity.

Credit

Code

exclude the member's military compensation

California did not conform to this provision. For

Orphan drug credit carryover

185

from gross income when computing the tax rate

California purposes, all rental activities are

Low-income housing

172

on nonmilitary income. Requirements for

treated as passive activities.

Research

183

military servicemembers domiciled in California

Targeted jobs*

166

Amortization of certain intangibles (IRC

remain unchanged. Military servicemembers

Section 197): Property classified as IRC

*For suspended credit generated prior to

domiciled in California must include their

January 1, 1996.

Section 197 property under federal law is also

military pay in gross income. In addition, they

IRC Section 197 property for California

must include their military pay in California

Note: Make sure to enter the code number for

purposes. There is no separate California

source income when stationed in California.

your credit on your return when you are able to

election required or allowed. However, for

However, military pay is not California source

claim the credit.

California purposes, in the case of

income when a servicemember is permanently

D Passive Activities

IRC Section 197 property acquired before

stationed outside of California. For more

January 1, 1994, the California adjusted basis as

information, get FTB Publication 1032, Tax

See the instructions for federal Form 8582-CR

of January 1, 1994, must be amortized over the

Information for Military Personnel .

for information about passive activities and

remaining federal amortization period. Therefore,

Nonresident

passive activity credits.

you may have a difference in net income (loss)

In determining California taxable income,

Dispositions

from passive activities which involve

nonresidents compute prior year items by taking

amortization of certain intangibles.

Unallowed passive activity credits, unlike

into account only those items with a California

unallowed passive activity losses, are not

source, subject to any limitations provided by

A Purpose

allowable when you dispose of your interest in

law. For example, passive losses are limited to

an activity in a taxable transaction. However, you

Use form FTB 3801-CR to determine whether

passive gains (IRC Section 469 and R&TC

may elect to increase the basis of the credit

you have a passive activity credit for the current

Sections 17551 and 17561). You must make this

FTB 3801-CR Instructions 2005

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Instructions For Form Ftb 3801-Cr - Passive Activity Credit Limitations - 2005

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