Classifying Passive vs. Non-Passive Activities

Categorizing activities between passive or non-passive is not an easy task.  Many times, this could determine if a current income deduction is received or which tax rate should be applied.  In general, passive losses may only offset other passive activities income.  If you have too much passive income, you will be subject to the 3.8% Medicare Surtax.  When taxpayers do not have other passive income, an activity with a loss needs to be non-passive to receive a current deduction. One of seven tests must be met to qualify as a non-passive activity.

To get you started, here is an IRS listing of common passive and non-passive activities:

Passive Activities

Income and losses from the following activities are generally passive:

  • Equipment leasing
  • Rental real estate (with some exceptions)
  • Sole proprietorship or farm in which the taxpayer does not materially participate
  • Limited partnerships with some exceptions
  • Partnerships, S-Corporations, and limited liability companies in which the taxpayer does not materially participate

Non-passive Activities

Income and losses from the following activities are generally non-passive:

  • Salaries, wages, and 1099 commission income
  • Guaranteed payments
  • Interest and dividends
  • Stocks and bonds
  • Sale of undeveloped land or other investment property
  • Royalties derived in the ordinary course of business
  • Sole proprietorship or farm in which the taxpayer materially participates
  • Partnerships, S-Corporations, and limited liability companies in which the taxpayer materially participates
  • Generally trusts in which the fiduciary materially participates

If you find your situation is more complicated, make sure to contact an Anders advisor today.