Passive Activity Loss ATG - Exhibit 2.6: Equipment Rentals IRC § 469(c)(2) and Reg. § 1.469-1T(e)(3)
Publication Date - December 2004
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Exhibit 2.6: Equipment Rentals IRC § 469(c)(2) and Reg. § 1.469-1T(e)(3)
ISSUE: Schedule C/E for _________________________
Are losses limited because activity is passive? Generally, long-term equipment rentals are passive, and losses (from Schedule C, E, F1065s or S Corporations) are not deductible unless taxpayer has passive income from another activity. An equipment lease of greater than seven days is generally passive. Whether or not the taxpayer materially participates is irrelevant. The IRC § 469(c)(2)&(4). Passive equipment rentals go on FORM 8582 and cannot be deducted in the absence of passive income. With short-term rentals, the activity is treated like a business and taxpayer must materially participate to deduct losses. See Reg. § 1.469-1T(e)(3)(ii) for exceptions to the rental definition.
_____ Determine the average period of customer use. Days rented divided by number of customers for the year. Customer use = Each period during which a customer has a continuous or recurring right to use the property (whether or not he actually uses it). Does the taxpayer have preferential rights to use the property? If so, the period of customer use is generally the entire year. If the average period of customer use is more than 7 days, activity is generally a rental activity (IRC § 469(c)(2)&(4) and Reg. § l.469-lT(e)(3)(i)), and losses are allowable only up to passive income from other activities. If customer use is less than 7 days, the activity is still passive unless the taxpayer materially participates (IRC § 469(h) and Reg. § 1.469-5T(a)).
_____ Secure lease and any other agreements. What is lease period? Does taxpayer have a recurring right to use the equipment? Does lease stipulate payments are for use of the equipment? OR are payments primarily for taxpayer’s services in driving and/or maintaining the equipment? A rental is defined as the lease of tangible property where amounts paid are principally for use of the property (Reg. § 1.469-1T(e)(3)(b)) - as opposed to a service intensive activity where rental of property is incidental to services received. Service intensive activities are generally treated as businesses.
_____ Secure insurance contracts. Is equipment insured personally? Is it insured for use by customers?
_____ Is the equipment leased to an S corporation in which the taxpayer is the 100 percent shareholder? If so, the taxpayer may be able to deduct his losses under IRC § 469. While rentals generally may not be grouped as a single activity under Reg. § 1.469-4(d), there is an exception, which permits a rental activity and the business leasing the property to group IF they are owned in identical percent and they form an integrated, interrelated economic unit. A rental activity, however, can never be grouped with a C Corporation.
CONCLUSION: Under IRC § 469, equipment losses are/are not allowed.