IRC 469 Passive Activities Part 5 last one Review passive activity flowchart Reporting PALs and related recordkeeping Cautions in dealing with 469 1 Agenda Review who is subject to 469 Review what is a passive activity Review preparing Form 8582 Reminders and cautions in dealing with the passive activity loss limitation and related rules 2 Who is subject to 469 469 a 2 A any individual estate or trust B any closely held C corporation and C any personal service corporation Also partnerships and S corporations Need to identify and possibly group activities Provide information to owners upon disposition of ownership in passthrough entity 1 469 2T c 2 Special rules for partners and S corporation shareholders 1 469 4 d 5 and e 3 1 469 2T e Election to not apply self charged interest rule 1 469 7 g 3 Closely held corporation CHC and 469 j 1 Closely held C corporation The term closely held C corporation means any C corporation described in section 465 a 1 B C corp Stock owned directly or indirectly by or for 5 or fewer individuals At any time during last half of year Such individuals own greater than 50 by value of the stock And per 1 469 1T g 2 is not a PSC So if C corp meets both definitions is a PSC for 469 purposes Warning PSC defined various ways throughout IRC ck applicable definition anytime you see reference to PSC in IRC 4 Personal service corporation PSC and 469 j 2 Personal service corporation The term personal service corporation has the meaning given such term by section 269A b 1 except that section 269A b 2 shall be applied A by substituting any for more than 10 percent and B by substituting any for 50 percent or more in value in section 318 a 2 C A corporation shall not be treated as a personal service corporation unless more than 10 percent of the stock by value in such corporation is held by employee owners within the meaning of section 269A b 2 as modified by the preceding sentence 1 469 1T g 2 i The term personal service corporation means a C corporation that is a personal service corporation for the taxable year within the meaning of 1 441 3 c 5 What is a passive activity No Activity 4 Wage personal services investment Yes Is gross income generated principally from use of tangible property Yes No Tangible personal property used by customers Working interest or trading personal property No Yes No Trade or Business per 4 b Yes Yes Does 280A c 5 apply Yes Section 469 n a Yes Does any rental exception apply No No Is any MP test met Yes Yes No No Is it rental of real estate by a real estate professional No Passive activity 6 Preparing Form 8582 7 8582 continued 8 Example from Pub 925 2009 See pdf on 225K website for the full text of the example and forms from the IRS Publication 925 for 2009 9 Activities Activity A RRE AP A 1231 gain B RRE AP PS1 PS2 PTP sold PS3 sold PS4 Worksheet 3 Sch D 2009 15 000 2 776 11 600 4 000 LTCG 15 300 1 200 LTCG 4 000 6 000 2 400 Sch E 2008 6 667 8 225 2 600 2 445 3 000 1 500 10 Pub 925 RRA AP Wages PTP2 PS3 MAGI Less Excess 132 000 11 655 15 300 1200 2445 5 000 sold so all PAL allowed 138 655 100 000 38 655 x 50 19 328 Amount allowed 25 000 19 328 5 673 Allocate this allowed PAL to each of the RRE AP based on proportion of loss from each activity 11 Pub 925 losses reported on Form 8582 RRA AP PS1 and PS4 Total Usable 469 i Suspended 38 716 2 500 41 216 5 673 35 543 15 000 6 667 2 776 11 600 8 225 allocate to the loss activities A B PS4 12 Suspended PALs PAL from activities that are not disposed of in 2009 13 Pub 925 example Schedule E Rental loss Partnership 1 Partnership 2 Partnership 3 Partnership 4 Total 9 701 1 400 3 645 9 000 148 Per worksheet 6 21 094 14 Pub 925 example Schedule D Activity A Partnership 2 Partnership 3 Total 2 776 15 300 4 000 22 076 15 Recordkeeping Need to track the suspended PAL per activity so can add it to the activity for the subsequent year for that activity Need to calculate and track amounts for AMT purposes for each activity as well 16 469 Cautions and Reminders Rental property is a dwelling unit Rental of dwelling at less than fair rent Using 469 i Recharacterization Participation reminders SPA Activity involves mostly personal services Debt 1022 and individuals who died in 2010 17 Rental property is a dwelling unit 280A d Per 469 j 10 and 1T e 5 if the limitations of 280A c 5 apply to rental of a dwelling it is not a passive activity So if personal use days of owner including use by others at less than fair rental and use by relatives is more than the greater of 14 days of 10 of the rental days any loss will be limited under 280A c 5 not 469 And if income is generated it is not PAI 18 Rental of dwelling at less than fair rent Causes such rental days to be considered personal use by owner So more likely for owner to meet use as a residence test of 280A d 1 and limitations of 280A c 5 rather than 469 Question what if donate 5 days use of your vacation home to a silent auction held by a charity Counts as personal use days 19 Using 469 i RRE AP Owner must actively participate in both year of loss and year loss claimed on return Must own at least 10 of the activity Modified AGI per 469 i must be below 150K Deductions for AGI better than from AGI Consider planning if AGI near 100K start of the phase out range No benefit if married persons file separately unless they live apart of entire year No benefit to limited partner unless future regs provide an exception Be sure is a rental no rental exception met Special rules for commercial revitalization deduction rehabilitation credit and low income housing credit 20 Recharacterization If have income from passive activity or gain from disposition of passive activity or property used in passive activity always check if any gain or income recharacterization rule applies Recharacterization rules only apply to income and gain not losses 21 Participation reminders Always check what both spouses do If no work performed Might still meet one of the prior year s MP tests Not all work counts 5T f Must be work customarily done by an owner Not done merely to meet a test Work done as investor won t count unless involved in management Documentation 5T f 4 While contemporaneous daily time reports not required need to have something to show quantity and nature of …