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Regulations section 1.163-8T to passive

Deductions and losses that would have

Self-Charged Interest

activities.

been allowed for tax years beginning before

Certain “self-charged” interest income or

1987, but for basis or at-risk limitations.

expense can be treated as passive activity

Recharacterization of Passive

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Net negative section 481 adjustments

gross income or passive activity deductions

Income

allocated to activities other than passive

if the loan proceeds are used in a passive

activities. See Temporary Regulations

Certain income from passive activities can

activity. Generally, self-charged interest

section 1.469-2T(d)(7).

be recharacterized and excluded from

income and expense result from loans

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Deductions for losses from fire, storm,

passive activity income. The amount of

between the corporation and a partnership

shipwreck, or other casualty, or from theft, if

income recharacterized equals the net

in which the corporation had a direct or

losses similar in cause and severity do not

income from the sources described below. If

indirect ownership interest. It also may result

regularly recur in the activity.

during the tax year the corporation received

from loans between one partnership and

net income from any of these sources

another if each owner in the borrowing entity

Former Passive Activities

(either directly or through a partnership), see

has the same proportional ownership

Pub. 925 for details on reporting net income

A former passive activity is any activity that

interest in the lending entity. The

or loss from these sources.

was a passive activity in a prior tax year but

self-charged interest rules do not apply to

the corporation’s partnership interest if the

is not a passive activity in the current tax

Income from the following sources may

partnership made an election under

year. A prior year unallowed loss from a

be subject to the net income

Regulations section 1.469-7(g) to avoid the

former passive activity is allowed to the

recharacterization rules.

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application of these rules. See Regulations

extent of current year income from the

Significant participation passive activities.

activity.

section 1.469-7 for details.

A significant participation passive activity is

any trade or business activity (see Trade or

If the current year net income from the

Passive Activity Income

Business Activities on page 3) in which the

activity is less than the prior year unallowed

Passive activity income includes all income

corporation is treated as having participated

loss, enter the prior year unallowed loss and

from passive activities, including (with

for more than 100 hours during the tax year

any current year net income from the activity

certain exceptions described in Temporary

but did not materially participate.

on Form 8810 and the applicable

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Regulations section 1.469-2T(c)(2) and

Rental of property when less than 30% of

worksheets.

Regulations section 1.469-2(c)(2)) gain from

the unadjusted basis of the property is

If the current year net income from the

the disposition of an interest in a passive

subject to depreciation.

activity is more than or equal to the prior

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activity or property used in a passive activity

Passive equity-financed lending activities.

year unallowed loss from the activity, report

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at the time of the disposition.

Rental of property incidental to a

the income and loss on the forms and

development activity.

Passive activity income does not include

schedules normally used; do not enter the

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Rental of property to a nonpassive

the following.

amounts on Form 8810.

activity.

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Income from an activity that is not a

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Acquisition of an interest in a

If the activity has a net loss for the

passive activity.

current year, enter the prior year unallowed

pass-through entity that licenses intangible

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Portfolio income, including interest,

property.

loss (but not the current year loss) on Form

dividends, annuities, and royalties not

8810 and the applicable worksheets.

derived in the ordinary course of a trade or

Passive Activity Deductions

business, and gain or loss from the

For rules about prior year unallowed

disposition of property that produces

Passive activity deductions include all

credits from former passive activities, see

deductions from activities that are passive

portfolio income or is held for investment

section 469(f).

activities for the current tax year and all

(see section 163(d)(5)). See Temporary

To report a disposition of a former

deductions from passive activities that were

Regulations section 1.469-2T(c)(3). See

passive activity, follow the rules under

disallowed under the PAL rules in prior tax

Self-Charged Interest above for an

Dispositions below.

exception.

years and carried forward to the current tax

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Personal service income, including

year under section 469(b). See Regulations

Dispositions

commissions and income from trade or

section 1.469-1(f)(4).

business activities in which the corporation

Passive activity deductions include

Disposition of Less Than an

materially participated for the tax year. See

losses from dispositions of property used in

Temporary Regulations section

Entire Interest

a passive activity at the time of the

1.469-2T(c)(4).

disposition and losses from a disposition of

Gains and losses from the disposition of

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Income from positive section 481

less than an entire interest in a passive

less than an entire interest in an activity are

adjustments allocated to activities other than

activity. See Dispositions, below, for the

treated as part of the net income or net loss

passive activities. See Temporary

treatment of losses upon certain dispositions

from the activity for the current year.

Regulations section 1.469-2T(c)(5).

of an entire interest in an activity.

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Note. A disposition of less than

Income or gain from investments of

substantially all of an entire interest does not

working capital.

Passive activity deductions do not

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trigger the allowance of prior year unallowed

Income from an oil or gas property if the

include the following.

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losses.

corporation treated any loss from a working

Deductions for expenses (other than

interest in the property for any tax year

interest expense) that are clearly and

Disposition of an Entire Interest

beginning after 1986 as a nonpassive loss

directly allocable to portfolio income.

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under the rule excluding working interests in

Dividends-received deductions for

If the corporation disposed of its entire

oil and gas wells from passive activities. See

dividends not included in passive activity

interest in a passive activity or a former

Regulations section 1.469-2(c)(6).

gross income.

passive activity to an unrelated party in a

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Any income treated as income not from a

Interest expense, other than interest

fully taxable transaction during the tax year,

passive activity under Temporary

expense properly allocable under

the losses allocable to the activity for the

Regulations section 1.469-2T(f) and

Temporary Regulations section 1.163-8T to

year are not limited by the PAL rules. A fully

Regulations section 1.469-2(f). See

passive activities or self-charged interest

taxable transaction is a transaction in which

Recharacterization of Passive Income

treated as a passive activity deduction (see

all the realized gain or loss is recognized.

below.

Self-Charged Interest above). For example,

If the corporation is using the installment

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Overall gain from any interest in a PTP.

capitalized interest expense is not a passive

method to report this kind of disposition,

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State, local, and foreign income tax

activity deduction.

figure the loss for the current year that is not

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refunds.

Losses from dispositions of property that

limited by the PAL rules by multiplying the

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Any reimbursement of a casualty or theft

produce portfolio income or property held for

corporation’s overall loss (which does not

loss included in income as recovery of all or

investment.

include losses allowed in prior years) by the

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part of a prior year loss deduction, if the

State, local, and foreign income taxes.

following fraction.

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deduction for the loss was not treated as a

Charitable contribution deductions.

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passive activity deduction.

Net operating loss deductions,

Gain recognized in the current year

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Cancellation of debt income to the extent

percentage depletion carryovers under

that at the time the debt was discharged it

section 613A(d), and capital loss carrybacks

Unrecognized gain as of the beginning

was not properly allocable under Temporary

and carryovers.

of the current year

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Instructions for Form 8810 (2010)

Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2010 Page 5

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