Shareholder'S Instructions For Schedule K-1 (Form 1120s)

4. Activities of trading personal

activities outside the corporation)

Effect of determination. Income

property for the account of owners of

during the year for more than 500

(loss), deductions, and credits from

interests in the activities.

hours. A significant participation

an activity are nonpassive if you

activity is any trade or business

determine that:

•

If you have a passive activity loss

activity in which you participated for

You materially participated in a

or credit, use Form 8582, Passive

more than 100 hours during the year

trade or business activity of the

Activity Loss Limitations, to figure

and in which you did not materially

corporation, or

•

your allowable passive losses, and

participate under any of the material

You were a real estate professional

Form 8582-CR, Passive Activity

participation tests (other than this

(defined on page 3) in a rental real

Credit Limitations, to figure your

test).

estate activity of the corporation.

allowable passive credit. See the

5. You materially participated in

See the specific instructions for

instructions for these forms for

the activity for any 5 tax years

each item for reporting information.

details.

(whether or not consecutive) during

If you determine that you did not

If the corporation had more than

the 10 tax years that immediately

materially participate in a trade or

one activity, it will attach a statement

precede the tax year.

business activity of the corporation, or

to your Schedule K-1 that identifies

6. The activity was a personal

if you have income (loss), deductions,

each activity (trade or business

service activity and you materially

or credits from a rental activity of the

activity, rental real estate activity,

participated in the activity for any 3

corporation (other than a rental real

rental activity other than rental real

tax years (whether or not

estate activity in which you materially

estate, etc.) and specifies the income

consecutive) preceding the tax year.

participated as a real estate

(loss), deductions, and credits from

A personal service activity involves

professional), the amounts from that

each activity.

the performance of personal services

activity are passive. Report passive

in the fields of health, law,

Material participation. You must

income (losses), deductions, and

engineering, architecture, accounting,

determine if you materially

credits as follows.

actuarial science, performing arts,

participated (a) in each trade or

1. If you have an overall gain (the

consulting, or any other trade or

business activity held through the

excess of income over deductions

business, in which capital is not a

corporation and (b), if you were a real

and losses, including any prior year

material income-producing factor.

estate professional (defined on page

unallowed loss) from a passive

3), in each rental real estate activity

7. Based on all of the facts and

activity, report the income,

circumstances, you participated in the

held through the corporation. All

deductions, and losses from the

activity on a regular, continuous, and

determinations of material

activity as indicated in these

substantial basis during the tax year.

participation are based on your

instructions.

participation during the corporation’s

2. If you have an overall loss (the

tax year.

Work counted toward material

excess of deductions and losses,

participation. Generally, any work

Material participation standards for

including any prior year unallowed

that you or your spouse does in

shareholders who are individuals are

loss, over income) or credits from a

connection with an activity held

listed below. Special rules apply to

passive activity, report the income,

through an S corporation (where you

certain retired or disabled farmers

deductions, losses, and credits from

own your stock at the time the work is

and to the surviving spouses of

all passive activities using the

done) is counted toward material

farmers. See the Instructions for

Instructions for Form 8582 or Form

participation. However, work in

Form 8582 for details.

8582-CR, to see if your deductions,

connection with the activity is not

Individuals. If you are an

losses, and credits are limited under

counted toward material participation

individual, you materially participated

the passive activity rules.

if either of the following applies.

in an activity only if one or more of

Special allowance for a rental real

1. The work is not the type of work

the following apply.

estate activity. If you actively

that owners of the activity would

1. You participated in the activity

participated in a rental real estate

usually do and one of the principal

for more than 500 hours during the

activity, you may be able to deduct up

purposes of the work that you or your

tax year.

to $25,000 of the loss from the

spouse does is to avoid the passive

2. Your participation in the activity

activity from nonpassive income. This

loss or credit limitations.

for the tax year constituted

“special allowance” is an exception to

2. You do the work in your

substantially all the participation in

the general rule disallowing losses in

capacity as an investor and you are

the activity of all individuals (including

excess of income from passive

not directly involved in the day-to-day

individuals who are not owners of

activities. The special allowance is

operations of the activity. Examples

interests in the activity).

not available if you were married, file

of work done as an investor that

3. You participated in the activity

a separate return for the year, and did

would not count toward material

for more than 100 hours during the

not live apart from your spouse at all

participation include:

tax year, and your participation in the

times during the year.

a. Studying and reviewing

activity for the tax year was not less

Only individuals and qualifying

financial statements or reports on

than the participation in the activity of

estates can actively participate in a

operations of the activity,

any other individual (including

rental real estate activity. Estates

b. Preparing or compiling

individuals who were not owners of

(other than qualifying estates) and

summaries or analyses of the

interests in the activity) for the tax

trusts cannot actively participate.

finances or operations of the activity

year.

for your own use, and

4. The activity was a significant

You are not considered to actively

participation activity for the tax year,

c. Monitoring the finances or

participate in a rental real estate

and you participated in all significant

operations of the activity in a

activity if, at any time during the tax

participation activities (including

nonmanagerial capacity.

year, your interest (including your

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Instructions for Schedule K-1 (Form 1120S)

Shareholder'S Instructions For Schedule K-1 (Form 1120s) - 2005 Page 4

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