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2006

Department of the Treasury

Internal Revenue Service

Instructions for Form 8810

Corporate Passive Activity Loss and Credit Limitations

all its passive activities exceed the sum of

Employee-owner. A person is

Section references are to the Internal

the total income from all its passive activities

considered to be an employee-owner if the

Revenue Code unless otherwise noted.

and its net active income.

person is an employee of the corporation on

Contents

Page

any day of the testing period, and owns any

A personal service corporation has a

General Instructions . . . . . . . . . . . . . . 1

outstanding stock of the corporation on any

passive activity credit for the year if its

Purpose of Form . . . . . . . . . . . . . . . . 1

day of the testing period. Stock ownership is

credits from passive activities (including

Who Must File . . . . . . . . . . . . . . . . . . 1

determined under the attribution rules of

prior year unallowed credits) exceed the tax

Definitions . . . . . . . . . . . . . . . . . . . . . 1

section 318, except that “any” is substituted

attributable to net passive income. A closely

Coordination With Other

for “50 percent or more in value” in section

held corporation has a passive activity credit

Limitations . . . . . . . . . . . . . . . . . . . . 1

318(a)(2)(C).

for the year if its credits from passive

Special Rules for Consolidated

For more information about personal

activities (including prior year unallowed

Group . . . . . . . . . . . . . . . . . . . . . . . 2

service corporations, see Regulations

credits) exceed the sum of the tax

Activities That Are Not Passive

section 1.441-3(c).

attributable to net passive income and the

Activities . . . . . . . . . . . . . . . . . . . . . 2

tax attributable to net active income.

Closely held corporation. A corporation is

Rental Activities . . . . . . . . . . . . . . . . . 2

a closely held corporation if at any time

For more information, see Pub. 925,

Trade or Business Activities . . . . . . . . 3

during the last half of the tax year more than

Passive Activity and At-Risk Rules.

Material Participation . . . . . . . . . . . . . 3

50% in value of its outstanding stock is

Grouping of Activities . . . . . . . . . . . . . 4

directly or indirectly owned, by or for not

Definitions

Passive Activity Income and

more than five individuals, and the

Deductions . . . . . . . . . . . . . . . . . . . 4

Except as otherwise indicated, the following

corporation is not a personal service

Former Passive Activities . . . . . . . . . . 5

terms are defined as shown below.

corporation.

Dispositions . . . . . . . . . . . . . . . . . . . 5

Certain organizations are treated as

Personal service corporation. A personal

Specific Instructions . . . . . . . . . . . . . . 6

individuals for this test (see section 542(a)).

service corporation is a corporation whose

2006 Passive Activity Loss (PAL) . . . . 7

For rules of determining stock ownership,

principal activity for the testing period

Publicly Traded Partnerships

see section 544 (as modified by section

(defined below) for the tax year is the

(PTPs) . . . . . . . . . . . . . . . . . . . . . . 9

465(a)(3)).

performance of personal services. The

2006 Passive Activity Credits . . . . . . . 9

Other Passive Activity Terms

services must be substantially performed by

Election To Increase Basis of

employee-owners. Employee-owners must

Credit Property . . . . . . . . . . . . . . . 10

Net income. The excess of current year

own more than 10% of the fair market value

income over current year deductions from

(FMV) of the corporation’s outstanding stock

General Instructions

the activity. This includes any current year

on the last day of the testing period.

gains or losses from the disposition of

Testing period. Generally, the testing

assets or an interest in the activity.

Purpose of Form

period for a tax year is the prior tax year.

Net loss. The excess of current year

The testing period for a new corporation

Personal service corporations and closely

deductions over current year income from

starts with the first day of its first tax year

held corporations use Form 8810 to figure

the activity. This includes any current year

and ends on the earlier of:

the amount of any passive activity loss

gains or losses from the disposition of

•

The last day of its first tax year, or

(PAL) or credit for the current tax year and

assets or an interest in the activity.

•

The last day of the calendar year in which

the amount of losses and credits from

Overall gain. The excess of the “net

the first tax year began.

passive activities allowed on the

income” from the activity over the prior year

Principal activity. The principal activity

corporation’s tax return. It is also used to

unallowed losses from the activity.

of a corporation is considered to be the

make the election to increase the basis of

Overall loss. The excess of the prior year

performance of personal services if, during

credit property when the corporation

unallowed losses from the activity over the

disposes of its interest in an activity for

the testing period, the corporation’s

“net income” from the activity or the prior

which it has an unused credit.

compensation costs for the performance of

year unallowed losses from the activity plus

personal services are more than 50% of its

the “net loss” from the activity.

Generally, passive activities include trade

total compensation costs.

or business activities in which the

Prior year unallowed losses. The

Performance of personal services.

corporation did not materially participate for

deductions and losses from an activity that

Personal services are those performed in

the tax year, and rental activities regardless

were disallowed under the PAL limitations in

the health, law, engineering, architecture,

of its participation.

a prior year and carried forward to the tax

accounting, actuarial science, performing

year under section 469(b). See Regulations

arts, or consulting fields (as defined in

Who Must File

section 1.469-1(f)(4).

Temporary Regulations section

Personal service corporations and closely

1.448-1T(e)). The term “performance of

Coordination With Other

held corporations that have losses or credits

personal services” includes any activity

(including prior year unallowed losses and

Limitations

involving the performance of personal

credits) from passive activities must file

services in these areas.

Generally, PALs are subject to other

Form 8810.

Substantial performance by

limitations (for example, basis, section 163(j)

A personal service corporation has a

employee-owners. Personal services are

interest deduction limitations, and at-risk

PAL for the year if the total losses (including

substantially performed by

limitations) before they are subject to the

prior year unallowed losses) from its passive

employee-owners if, for the testing period,

PAL limitations. Once a loss becomes

activities exceed the total income from its

more than 20% of the corporation’s

allowable under these other limitations, the

passive activities. A closely held corporation

compensation costs for the performance of

corporation must determine whether the loss

has a PAL for the year if the total losses

personal services are for services performed

is limited under the PAL rules. See Form

(including prior year unallowed losses) from

by employee-owners.

6198, At-Risk Limitations, for details on the

Cat. No. 10357E

Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2006

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