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Passive Activity Losses Edition

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Description

IRS Tax Audit Manual for Passive Activity Losses

Provides IRS examiners with specific guidance on potential audit issues, issue identification and lead sheets and other job aids. Examples and citation are based on 1994 law.

TABLE OF CONTENTS

  • INTRODUCTION v
  • WHAT’S NEW vii
  • SUMMARY OF EXHIBITS ix
  • CHAPTER 1 AN OVERVIEW OF THE LAW AND FORM 8582
    • Introduction 1-1
    • Two Types of Passive Activities 1-2
    • Activity Rules 1-3
    • Exceptions to the Loss Disallowance Rule 1-4
    • Participation Rules 1-5
    • Material Participation 1-6
    • Active Participation 1-6
    • Form 8582 1-7
    • Completion of Form and Worksheets 1-7
    • Audit Issues 1-9
    • Issue Identification 1-9
    • Summary 1-9
  • CHAPTER 2 RENTAL ISSUES
    • Introduction 2-1
    • Exceptions to Rental Activities 2-2
    • Equipment Rental Issues 2-3
    • Real Estate Issues 2-5
    • $25,000 Offset Issues 2-8
    • Limited Partner Issues 2-9
    • Vacation Rental Issues 2-10
    • Automatic Adjustments 2-10
    • Real Estate Professionals 2-15
    • Income From Self-Rented Property 2-18
    • Issue Identification 2-19
    • Summary 2-20
  • CHAPTER 3 MATERIAL PARTICIPATION
    • Introduction 3-1
    • Rules of Time 3-1
    • General Rule 3-1
    • Quantitative Time Tests 3-2
    • More Than 500 Hours 3-3
    • Substantially All Participation 3-4
    • 100-500 Hours and More Than Anyone Else 3-4
    • Significant Participation Activity (SPA) 3-5
    • Computation of Overall Gain or Loss on SPAs 3-6
    • Any 5 of 10 Past years 3-9
    • Any 3 Years in Personal Service Activity 3-9
    • Facts and Circumstances 3-10
    • Limited Partners 3-10
    • Retired or Disabled Farmer and
    • Surviving Spouse of Farmer 3-12
    • Treatment of Former Passive Activities 3-12
    • Proof of Participation 3-12
    • Qualifying Participation 3-13
    • General Rule 3-13
    • Nonqualifying Time 3-14
    • Participation Issues 3-15
    • Issue Identification 3-15
    • Summary 3-16
  • CHAPTER 4 INCOME ISSUES
    • Introduction 4-1
    • General Rules 4-2
    • Nonpassive Income 4-2
    • Material Participation Activities 4-3
    • Portfolio Income 4-3
    • Personal Service Income 4-4
    • Recharacterization Issues 4-6
    • Nondepreciable Rental Property 4-6
    • Rental to Nonpassive Activity 4-7
    • Rental Incidental to Development Activity 4-8
    • Disposition Issues 4-9
    • General Rules 4-9
    • Losses 4-10
    • Nonqualifying Dispositions 4-11
    • Installment Sales 4-13
    • Substantially Appreciated Property 4-15
    • Multiple Activities in Past 12 Months 4-16
    • Dealer Rules 4-17
    • Issue Identification 4-17
    • Summary 4-18
  • CHAPTER 5 ENTITY ISSUES
    • Introduction 5-1
    • Partnerships 5-1
    • Limited Partnerships 5-2
    • Limited Liability Companies (LLC) 5-3
    • Publicly Traded Partnerships (PTPs) 5-4
    • Corporations 5-5
    • Material Participation for Corporations 5-5
    • Closely Held C-Corporations 5-6
    • Relief Provisions for Closely Held C-Corporations 5-8
    • Personal Service Corporations 5-8
    • S-Corporations 5-9
    • Consolidated Returns 5-9
    • Change in Corporate Status 5-10
    • Loss Determinations and TEFRA Issues 5-11
    • Taxable Years 5-13
    • Tiered Structures 5-13
    • Self-Charged Interest and Other Items 5-14
    • Effect of Regulations 5-15
    • Flow-Through Entity’s Election 5-15
    • Dispositions of Partnership and S-Corporation Interests 5-16
    • Trusts and Estates 5-18
    • Issue Identification 5-18
    • Summary 5-19
  • CHAPTER 6 INTERACTION WITH OTHER CODE SECTIONS
    • Introduction 6-1
    • Basis and At-Risk Provisions 6-1
    • Rental of Personal Residence 6-2
    • Investment Interest 6-4
    • Net Operating Losses 6-6
    • Alternative Minimum Tax 6-7
    • Low Income Housing 6-9
    • Rehabilitation Credit 6-11
    • Oil and Gas 6-11
    • Casualty Loss 6-12
    • Summary 6-13
  • CHAPTER 7 ACTIVITY RULES
    • Introduction 7-1
    • Temporary Treasury Regulations 7-1
    • Final Regulations 7-2
    • Trade or Business Activity 7-3
    • Appropriate Economic Unit 7-3
    • Rental Activities 7-5
    • Limited Partners and Limited Entrepreneurs 7-7
    • Flow-Through Entities 7-8
    • Activities Conducted Through a Closely Held
    • C-Corporation or Personal Service Corporation 7-8
    • Consistency Requirement 7-8
    • Anti-Abuse Rule 7-9
    • Effect on Dispositions 7-10
    • Issue Identification 7-11
    • Summary 7-11
  • GLOSSARY G-1
Don’t forget – The IRS Tax Audit Manual for Passive Activity Losses isĀ tax deductible as a business expense!