Passive Activity Loss ATG - Exhibit 6.1: C Corporations: Passive Activity Issues
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 6.1: C Corporations: Passive Activity Issues
Personal Service Corps
The passive loss limitations in IRC § 469 apply in full to all PSCs, whether or not closely held. A passive loss cannot offset corporate income or portfolio income - nor can it create an NOL. A passive loss goes on Form 8810 and is deductible only to the extent of passive income.
_____ Are there any losses or credits from rental or leasing activities offsetting corporate and portfolio income?
_____ Are there any partnership or S corporation losses or credits which are rental real estate or leasing activities? Typical passive activity credits: low income housing credit and rehabilitation credit.
_____ Are there any businesses conducted in partnerships and S Corporations in which a 50 percent + shareholder does not materially participate? (See log at end of Chapter 4.)
Closely Held C Corporations
A closely held C Corporation that is not a PSC can offset a passive loss against net against net active corporate income, but not against portfolio income. A passive loss cannot create an NOL. Closely held means 5 or fewer shareholders hold more than 50 percent of the stock at year-end.
_____ Are losses or credits from rentals OR partnership or S Corporation businesses in which the corporation (50 percent + shareholder) does not materially participate in offsetting interest, dividends, gains on stocks and bonds, royalties or other portfolio income in error?
_____ Have losses from rentals and partnership or S Corporations businesses been carried back in error as NOLs? Passive losses can only be carried forward. They cannot be carried back.
Related issues which fall out on the shareholder’s Form 1040:
Applies to both PSCs and closely held C Corporations.
_____ Is the building owned by the shareholder and leased back to the corporation? Or is the building held in a partnership and leased back to the corporation? If so, net rental income generally should not be on Form 8582 line 1a, triggering otherwise nondeductible passive losses. See Reg. § 1.469-2(f)(6).
_____ Is any equipment or vehicle held in partnership or by the shareholder personally and leased back to the corporation? If so, losses are may be passive, i.e. they belong on Form 8582 line 3b (2b prior to 2002) on the shareholder’s Form 1040. Losses from leasing activities are nondeductible in the absence of passive income. See IRC § 469(c)(2)(4).