2011 Shareholder'S Instructions For Schedule K-1 (Form 1120s) (Page 4 of 14) in pdf

If you have a passive activity loss

participate under any of the material

If you determine that you did not

or credit, use Form 8582, Passive

participation tests (other than this

materially participate in a trade or

Activity Loss Limitations, to figure

test).

business activity of the corporation or

your allowable passive losses and

5. You materially participated in

if you have income (loss), deductions,

Form 8582-CR, Passive Activity

the activity for any 5 tax years

or credits from a rental activity of the

Credit Limitations, to figure your

(whether or not consecutive) during

corporation (other than a rental real

allowable passive credits. See the

the 10 tax years that immediately

estate activity in which you materially

instructions for these forms for

precede the tax year.

participated as a real estate

details.

6. The activity was a personal

professional), the amounts from that

service activity and you materially

activity are passive. Report passive

If the corporation had more than

participated in the activity for any 3

income (losses), deductions, and

one activity, it will attach a statement

tax years (whether or not

credits as follows.

to your Schedule K-1 that identifies

consecutive) preceding the tax year.

1. If you have an overall gain (the

each activity (trade or business

A personal service activity involves

excess of income over deductions

activity, rental real estate activity,

the performance of personal services

and losses, including any prior year

rental activity other than rental real

in the fields of health, law,

unallowed loss) from a passive

estate, etc.) and specifies the income

engineering, architecture, accounting,

activity, report the income,

(loss), deductions, and credits from

actuarial science, performing arts,

deductions, and losses from the

each activity.

consulting, or any other trade or

activity as indicated in these

Material participation. You must

business in which capital is not a

instructions.

determine if you materially

material income-producing factor.

2. If you have an overall loss (the

participated (a) in each trade or

7. Based on all the facts and

excess of deductions and losses,

business activity held through the

circumstances, you participated in the

including any prior year unallowed

corporation and (b) if you were a real

activity on a regular, continuous, and

loss, over income) or credits from a

estate professional (defined earlier),

substantial basis during the tax year.

passive activity, report the income,

in each rental real estate activity held

deductions, losses, and credits from

through the corporation. All

Work counted toward material

all passive activities using the

determinations of material

participation. Generally, any work

Instructions for Form 8582 or Form

participation are based on your

that you or your spouse does in

8582-CR, to see if your deductions,

participation during the corporation’s

connection with an activity held

losses, and credits are limited under

tax year.

through an S corporation (where you

the passive activity rules.

Material participation standards for

own your stock at the time the work is

shareholders who are individuals are

done) is counted toward material

Special allowance for a rental real

listed below. Special rules apply to

participation. However, work in

estate activity. If you actively

certain retired or disabled farmers

connection with the activity is not

participated in a rental real estate

and to the surviving spouses of

counted toward material participation

activity, you may be able to deduct up

farmers. See the Instructions for

if either of the following applies.

to $25,000 of the loss (or credit

Form 8582 for details.

equivalent to a $25,000 deduction)

1. The work is not the type of work

Individuals. If you are an

from the activity from nonpassive

that owners of the activity would

income. This “special allowance” is

individual, you materially participated

usually do and one of the principal

in an activity only if one or more of

an exception to the general rule

purposes of the work that you or your

the following apply.

disallowing losses in excess of

spouse does is to avoid the passive

income from passive activities. The

loss or credit limitations.

1. You participated in the activity

special allowance is not available if

2. You do the work in your

for more than 500 hours during the

you were married, file a separate

capacity as an investor and you are

tax year.

return for the year, and did not live

not directly involved in the day-to-day

2. Your participation in the activity

apart from your spouse at all times

operations of the activity. Examples

for the tax year constituted

during the year.

of work done as an investor that

substantially all the participation in

would not count toward material

the activity of all individuals (including

Only individuals can actively

participation include:

individuals who are not owners of

participate in a rental real estate

a. Studying and reviewing

interests in the activity).

activity. However, a decedent’s estate

financial statements or reports on

3. You participated in the activity

(including a qualified revocable trust

operations of the activity,

for more than 100 hours during the

for which a section 645 election has

b. Preparing or compiling

tax year, and your participation in the

been made) is treated as actively

summaries or analyses of the

activity for the tax year was not less

participating for its tax years ending

finances or operations of the activity

than the participation in the activity of

less than 2 years after the decedent’s

for your own use, and

any other individual (including

death, if the decedent would have

c. Monitoring the finances or

individuals who were not owners of

satisfied the active participation

operations of the activity in a

interests in the activity) for the tax

requirement for the activity for the tax

nonmanagerial capacity.

year.

year the decedent died.

4. The activity was a significant

You are not considered to actively

Effect of determination. Income

participation activity for the tax year,

participate in a rental real estate

and you participated in all significant

(loss), deductions, and credits from

activity if, at any time during the tax

participation activities (including

an activity are nonpassive if you

year, your interest (including your

activities outside the corporation)

determine that:

spouse’s interest) in the activity was

•

during the year for more than 500

You materially participated in a

less than 10% (by value) of all

hours. A significant participation

trade or business activity of the

interests in the activity.

activity is any trade or business

corporation, or

•

activity in which you participated for

You were a real estate professional

Active participation is a less

more than 100 hours during the year

(defined earlier) in a rental real estate

stringent requirement than material

and in which you did not materially

activity of the corporation.

participation. You may be treated as

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Instructions for Schedule K-1 (Form 1120S)

2011 Shareholder'S Instructions For Schedule K-1 (Form 1120s) Page 4

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