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they are performed by individuals and the

2. Whether the corporation materially

(PTPs) on page 10. See Pub. 925 for how

customers’ use of the property is

participated in the activity for the tax year.

to report income or losses from significant

participation passive activities.

incidental to their receipt of the services.

To report income, deductions, losses, or

3. Rental of the property is incidental

In general, if the corporation has

credits from a trade or business activity in

to a nonrental activity.

credits from passive activities, use

which the corporation did not materially

Worksheet 5 on page 11 to figure the

The rental of property is incidental to

participate, see Trade or business

amount to enter in Part II of Form 8810.

an activity of holding property for

activities without material participation

However, if the corporation held the

investment if the main purpose of holding

below.

activity through a PTP, special rules

the property is to realize a gain from its

If the corporation meets any of the five

apply. See Credits From PTPs on page

appreciation and the gross rental income

exceptions listed above and the activity is

12 for how to report credits from these

is less than 2% of the smaller of the

a trade or business activity in which the

activities.

unadjusted basis or the fair market

corporation materially participated, report

any income, deduction, loss, or credit

value (FMV) of the property.

Material Participation

from the activity on the forms or

Unadjusted basis is the cost of the

schedules normally used.

property without regard to depreciation

Personal service corporations and closely

deductions or any other basis adjustment

If the rental activity did not meet any

held corporations materially or

described in section 1016.

of the five exceptions, it is generally a

significantly participate in an activity if one

passive activity. Special rules apply if the

or more individuals, each of whom would

The rental of property is incidental to a

corporation conducted the rental activity

materially or significantly participate in the

trade or business activity if:

through a publicly traded partnership

activity if the corporation’s activity were

a. The corporation owned an interest

(PTP) or if any of the rules described

the individual’s activity, directly or

in the trade or business activity during the

under Recharacterization of Passive

indirectly own more than 50% (by value)

tax year;

Income on page 5 apply. See the PTP

of the corporation’s outstanding stock. For

b. The rental property was mainly

rules on page 10.

this purpose, an individual’s participation

used in the trade or business activity

in all activities other than activities of the

If none of the special rules apply, use

during the tax year or during at least 2 of

corporation is disregarded.

Worksheets 1 and 2 on page 7 to

the 5 preceding tax years; and

determine the amount to enter in Part I of

A closely held corporation also

c. The gross rental income from the

Form 8810 for each passive rental

materially participates in an activity if the

property is less than 2% of the smaller of

activity. If the corporation has credits from

corporation satisfies the qualifying

the unadjusted basis or the FMV of the

passive rental activities, use Worksheet 5

business requirements of section

property.

on page 11 to figure the amount to enter

465(c)(7)(C) (without regard to (iv) for the

Lodging provided for the employer’s

in Part II of Form 8810.

excluded business exception from the

convenience to an employee or the

at-risk limitations).

Trade or Business

employee’s spouse or dependents is

These requirements are met if:

incidental to the activity or activities in

Activities

1. During the entire 12-month period

which the employee performs services.

ending on the last day of the tax year,

A trade or business activity is an activity

4. The corporation customarily makes

substantially all the services of at least

(other than a rental activity or an activity

the rental property available during

one full-time employee of the corporation

treated as incidental to an activity of

defined business hours for nonexclusive

were in the active management of the

holding property for investment) that:

use by various customers.

activity;

1. Involves the conduct of a trade or

5. The corporation provides property

2. During the same period,

business (within the meaning of section

for use in a nonrental activity of a

substantially all the services of at least

162),

partnership or joint venture in its capacity

three full-time nonowner employees were

2. Is conducted in anticipation of

as an owner of an interest in such

directly related to the activity; and

starting a trade or business, or

partnership or joint venture.

3. The deductions attributable to the

3. Involves research or experimental

Example. If a partner contributes the

activity and allowed solely under sections

expenditures deductible under section

use of property to a partnership, none of

162 and 404 exceed 15% of the gross

174 (or that would be if the corporation

the partner’s distributive share of

income from the activity for the tax year.

chose to deduct rather than capitalize

partnership income is income from a

them).

rental activity unless the partnership is

Participation. For purposes of the

engaged in a rental activity.

material participation tests listed below,

Reporting Income, Deductions,

participation generally includes any work

Also, a partner’s gross income

Losses, and Credits From the

the individual did (without regard to the

attributable to a guaranteed payment

Activities

capacity in which the individual did it) in

under section 707(c) is not income from a

connection with an activity in which the

rental activity. The determination of

Trade or business activities with

corporation owned an interest at the time

whether the property used in the activity

material participation. If the corporation

the individual did the work.

is provided in the partner’s capacity as an

materially participated in a trade or

owner of an interest in the partnership is

Work is not treated as participation,

business activity, the activity is not a

made on the basis of all the facts and

however, if the work is not work that an

passive activity. Report the income,

circumstances.

owner of that type of activity would

deductions, losses, and credits from the

customarily do, and if one of the

activity on the form or schedule normally

individual’s main reasons for doing the

used.

Reporting Income, Deductions,

work is to avoid the disallowance of

Trade or business activities without

Losses, and Credits From the

losses or credits from the activity under

material participation. In general, use

Activities

the passive loss and credit rules.

Worksheets 1 and 2 on page 7 to

If the corporation meets any of the five

determine the amount to enter in Part I of

Proof of participation. Participation

exceptions listed above, the corporation’s

Form 8810 for each trade or business

in an activity can be proved by any

rental of the property is not a rental

activity in which the corporation did not

reasonable means. Contemporaneous

activity. The corporation then must

materially participate. If, however, the

daily time reports, logs, or similar

determine:

corporation held the activity through a

documents are not required if

1. Whether the rental of the property

PTP or the activity is a significant

participation can be established by other

is a trade or business activity (see Trade

participation activity, special rules apply.

reasonable means. Reasonable means

or Business Activities below) and, if so,

See Publicly Traded Partnerships

for this purpose may include, but are not

-3-

Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2002 Page 3

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