Instructions For Schedule C 1040 - 2016 (Page 4 of 18) in pdf

If you use the accrual method, report

ses, later. If you have a profit from the

dividuals (including individuals who did

income when you earn it and deduct ex-

rental of property to a nonpassive activi-

not own any interest in the activity) for

penses when you incur them even if you

ty, see Recharacterization of Passive In-

the tax year.

do not pay them during the tax year. Ac-

come in Pub. 925 to find out how to re-

3. You participated in the activity

crual-basis taxpayers are put on a cash

port the net income.

for more than 100 hours during the tax

basis for deducting business expenses

year, and you participated at least as

Material participation. For purposes

owed to a related cash-basis taxpayer.

much as any other person for the tax

of the seven material participation tests

Other rules determine the timing of de-

year. This includes individuals who did

listed later, participation generally in-

ductions based on economic perform-

not own any interest in the activity.

cludes any work you did in connection

ance. See Pub. 538.

4. The activity is a significant par-

with an activity if you owned an interest

To change your accounting method,

ticipation activity for the tax year, and

in the activity at the time you did the

you generally must file Form 3115. You

you participated in all significant partici-

work. The capacity in which you did the

also may have to make an adjustment to

pation activities for more than 500 hours

work does not matter. However, work is

prevent amounts of income or expense

during the year. An activity is a “signifi-

not treated as participation if it is work

from being duplicated or omitted. This

cant participation activity” if it involves

that an owner would not customarily do

is called a section 481(a) adjustment.

the conduct of a trade or business, you

in the same type of activity and one of

participated in the activity for more than

your main reasons for doing the work

Example. You change to the cash

100 hours during the tax year, and you

was to avoid the disallowance of losses

method of accounting and choose to ac-

did not materially participate under any

or credits from the activity under the

count for inventoriable items in the same

of the material participation tests (other

passive activity rules.

manner as materials and supplies that

than this test 4).

are not incidental. You accrued sales in

Work you did as an investor in an ac-

5. You materially participated in the

2015 for which you received payment in

tivity is not treated as participation un-

activity for any 5 of the prior 10 tax

2016. You must report those sales in

less you were directly involved in the

years.

both years as a result of changing your

day-to-day management or operations of

accounting method and must make a

the activity. Work done as an investor

6. The activity is a personal service

section 481(a) adjustment to prevent du-

includes:

activity in which you materially partici-

plication of income.

Studying and reviewing financial

pated for any 3 prior tax years. A per-

statements or reports on the activity,

sonal service activity is an activity that

A net negative section 481(a) adjust-

Preparing or compiling summaries

involves performing personal services in

ment is taken into account entirely in the

or analyses of the finances or operations

the fields of health, law, engineering, ar-

year of the change. A net positive sec-

of the activity for your own use, and

chitecture, accounting, actuarial science,

tion 481(a) adjustment is generally taken

Monitoring the finances or opera-

performing arts, consulting, or any other

into account over a period of 4 years. In-

tions of the activity in a nonmanagerial

trade or business in which capital is not

clude any net positive section 481(a) ad-

capacity.

a material income-producing factor.

justments on line 6. If the net section

481(a) adjustment is negative, report it

Participation by your spouse during

7. Based on all the facts and circum-

in Part V.

the tax year in an activity you own can

stances, you participated in the activity

be counted as your participation in the

on a regular, continuous, and substantial

For more information about changing

activity. This rule applies even if your

basis for more than 100 hours during the

your accounting method and the section

spouse did not own an interest in the ac-

tax year.Your participation in managing

481(a) adjustment, see the Instructions

tivity and whether or not you and your

the activity does not count in determin-

for Form 3115. Additional information

spouse file a joint return. However, this

ing if you meet this test if any person

is also available in various revenue pro-

rule does not apply for purposes of de-

(except you) (a) received compensation

cedures. See Rev. Proc. 2015-13 for the

termining whether you and your spouse

for performing management services in

general procedures to obtain the advance

can elect to have your business treated

connection with the activity, or (b) spent

(non-automatic) consent or automatic

as a qualified joint venture instead of a

more hours during the tax year than you

consent of the Commissioner to change

partnership (see

Qualified Joint

Venture,

spent performing management services

a method of accounting. Rev. Proc.

earlier).

in connection with the activity (regard-

2015-13 is available at

IRS.gov/irb/

less of whether the person was compen-

For purposes of the passive activity

2015-5_IRB/ar12.html.

sated for the services).

rules, you materially participated in the

Line G

operation of this trade or business activi-

Rental of personal property. General-

ty during 2016 if you met any of the fol-

ly, a rental activity (such as long-term

If your business activity was not a rental

lowing seven tests.

equipment leasing) is a passive activity

activity and you met any of the material

1. You participated in the activity

even if you materially participated in the

participation tests, explained next, or the

for more than 500 hours during the tax

activity. However, if you met any of the

exception for oil and gas

applies, check

year.

five exceptions listed under Rental Ac-

the “Yes” box. Otherwise, check the

2. Your participation in the activity

tivities in the Instructions for Form

“No” box. If you check the “No” box,

for the tax year was substantially all of

8582, the rental of the property is not

this activity is passive. If you have a loss

the participation in the activity of all in-

treated as a rental activity and the

from a passive activity, see

Limit on los-

C-4

Instructions For Schedule C 1040 - 2016 Page 4

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