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leasing section 1245 property; or

1.469-2(c)(2)) gain from the disposition of

Income from the following sources

exploring for or exploiting oil and gas

an interest in a passive activity or

may be subject to the net income

resources or geothermal deposits.

property used in a passive activity at the

recharacterization rules:

•

time of the disposition.

Significant participation passive

Activities conducted through

activities. A significant participation

Passive activity income does not

partnerships and other C corporations

passive activity is any trade or business

include the following:

subject to section 469. Once a

activity (defined on page 3) in which the

•

partnership or corporation determines its

Income from an activity that is not a

corporation is treated as having

activities under these rules, a partner or

passive activity.

participated for more than 100 hours

•

shareholder may use these rules to group

during the tax year but did not materially

Portfolio income, including interest,

those activities with:

participate.

dividends, annuities, and royalties not

•

Each other,

Rental of property when less than 30%

derived in the ordinary course of a trade

•

Activities conducted directly by the

of the unadjusted basis of the property is

or business, and gain or loss from the

partner or shareholder, or

subject to depreciation.

disposition of property that produces

•

Activities conducted through other

Passive equity-financed lending

portfolio income or is held for investment

partnerships and corporations.

activities.

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

•

A partner or shareholder may not treat

Rental of property incidental to a

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

as separate activities those activities

development activity.

Self-Charged Interest above for an

•

grouped together by the partnership or

Rental of property to a nonpassive

exception.

corporation.

•

activity.

Personal service income, including

•

Partial disposition of an activity.

Acquisition of an interest in a

commissions and income from trade or

The corporation may treat the disposition

pass-through entity that licenses

business activities in which the

of substantially all of an activity as a

intangible property.

corporation materially participated for the

separate activity if it can prove with

tax year. See Temporary Regulations

Passive Activity Deductions

reasonable certainty:

section 1.469-2T(c)(4).

•

Passive activity deductions include all

1. The prior year unallowed losses

Income from positive section 481

deductions from activities that are passive

and credits, if any, allocable to the part of

adjustments allocated to activities other

activities for the current tax year and all

the activity disposed of and

than passive activities. See Temporary

deductions from passive activities that

2. The net income or loss and any

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

were disallowed under the PAL rules in

credits for the year of disposition allocable

•

Income or gain from investments of

prior tax years and carried forward to the

to the disposed part of the activity.

working capital.

current tax year under section 469(b).

•

Income from an oil or gas property if

See Regulations section 1.469-1(f)(4).

Passive Activity Income

the corporation treated any loss from a

Passive activity deductions include

working interest in the property for any tax

and Deductions

losses from dispositions of property used

year beginning after 1986 as a

Take into account only passive activity

in a passive activity at the time of the

nonpassive loss under the rule excluding

income and passive activity deductions to

disposition and losses from a disposition

working interests in oil and gas wells from

figure the corporation’s overall gain or

of less than an entire interest in a passive

passive activities. See Regulations

overall loss from all passive activities or

activity. See Dispositions below for the

section 1.469-2(c)(6).

any passive activity. In figuring the

•

treatment of losses upon certain

Any income treated as income not from

passive activity loss, a closely held

dispositions of an entire interest in an

passive activity under Temporary

corporation subtracts both passive activity

activity.

Regulations section 1.469-2T(f) and

income and net active income from its

Regulations section 1.469-2(f). See

Passive activity deductions do not

passive activity deductions. See the

Recharacterization of Passive Income

include the following:

instructions for line 2 on page 8 for the

•

below.

Deductions for expenses (other than

definition of net active income.

•

interest expense) that are clearly and

Overall gain from any interest in a PTP.

Self-Charged Interest

•

directly allocable to portfolio income.

State, local, and foreign income tax

•

Dividends-received deductions for

Certain “self-charged” interest income or

refunds.

dividends not included in passive activity

•

expense may be treated as passive

Any reimbursement of a casualty or

gross income.

activity gross income or passive activity

theft loss included in income as recovery

•

Interest expense, other than interest

deductions if the loan proceeds are used

of all or part of a prior year loss

expense properly allocable under

in a passive activity. Generally,

deduction, if the deduction for the loss

Temporary Regulations section 1.163-8T

self-charged interest income and expense

was not treated as a passive activity

to passive activities or self-charged

result from loans between the corporation

deduction.

interest treated as a passive activity

and a partnership in which the corporation

•

Cancellation of debt income to the

deduction (see Self-Charged Interest on

had a direct or indirect ownership interest.

extent that at the time the debt was

this page). For example, capitalized

It also may result from loans between one

discharged the debt was not properly

interest expense is not a passive activity

partnership and another if each owner in

allocable under Temporary Regulations

deduction.

the borrowing entity has the same

•

section 1.163-8T to passive activities.

Losses from dispositions of property

proportional ownership interest in the

that produce portfolio income or property

lending entity. The self-charged interest

Recharacterization of Passive

held for investment.

rules do not apply to the corporation’s

•

Income

State, local, and foreign income taxes.

partnership interest if the partnership

•

Certain income from passive activities

Charitable contribution deductions.

made an election under Regulations

•

may be recharacterized and excluded

Net operating loss deductions,

section 1.469-7(g) to avoid the application

from passive activity income. The amount

percentage depletion carryovers under

of these rules. See Regulations section

of income recharacterized equals the net

section 613A(d), and capital loss

1.469-7 for details.

income from the sources described

carrybacks and carryovers.

•

Passive Activity Income

below. If during the tax year the

Deductions and losses that would have

Passive activity income includes all

corporation received net income from any

been allowed for tax years beginning

income from passive activities, including

of these sources (either directly or

before 1987, but for basis or at-risk

(with certain exceptions described in

through a partnership), see Pub. 925 for

limitations.

•

Temporary Regulations section

details on reporting net income or loss

Net negative section 481 adjustments

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

from these sources.

allocated to activities other than passive

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Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2002 Page 5

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