[k1zuna]

“passive activity = any activity in which the taxpayer doesn’t materially participate, such as rental activities, interests in limited partnerships, S Corps.”

Can anyone confirm if these are correct? (taken from my Becker notes):

1. interest in limited partnership/S Corps = passive, even if limited partner actively participated

2. interest in general partnership = passive to the general partner, when general partner doesn’t actively participate.

Also,

3. if the partner in the above 2 scenarios get a k-1, k-1’s “line 1 – ordinary business income” is still ordinary income to the partner?

4. what else constitutes passive activity? this is driving me crazy.

Thanks in advance!

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[k1zuna]

Passive Activity Income:

Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity.

Passive activity income does not include the following items.

Income from an activity that is not a passive activity. These activities are discussed under Activities That Are Not Passive Activities , earlier.

Portfolio income. This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. For more information on self-charged interest, see Self-charged interest , earlier.

Personal service income. This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services.

Income from positive section 481 adjustments allocated to activities other than passive activities. (Section 481 adjustments are adjustments that must be made due to changes in your accounting method.)

Income or gain from investments of working capital.

Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence.

Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property.

Any other income that must be treated as nonpassive income. See Recharacterization of Passive Income , later.

Overall gain from any interest in a publicly traded partnership. See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582.

State, local, and foreign income tax refunds.

Income from a covenant not to compete.

Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction.

Alaska Permanent Fund dividends.

Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest.

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what the… interests and dividends are passive income?

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[MBA MST CPA]

I am pretty certain that, by definition, a limited partner cannot materially participate in a partnership because he isn't involved in the day-to-day management. Likewise a general partner typically (but not always) would materially participate since he is running the show.

REG - 11/5/2012 - 80
BEC - 1/17/2013 - 76
AUD - 2/22/2013 - 70 4/5/2013 - 75
FAR - 5/28/2013 - 75 - Done!!!

Question: What do you call someone who only gets 75's and 76's on the four parts of the CPA exam?

Answer: A CPA

[Anonymous]

1. Is correct, because, by definition, a limited partner cannot participate = passive.

2. Is correct, because when you don't participate, it's passive by definition.

3. Every partner or S-corp SH will receive a K-1, no matter what's happening. So yes, it's still ordinary income. I think I know what you're asking here, and ordinary income can still be either passive or active. You're just back to the same rules as before.

4. I think you're overloading yourself. I do that all the time, too. Just think of this this way….

-If there is no participation, it's passive. ALWAYS! Exemption won't even apply if you don't participate.

-The only exception is the real estate exemption: With rental activity, you can count up to 25K of rental losses as though they are active, and thus deduct that loss as an ordinary loss. 50% of anything OVER 100K AGI will reduce the 25K. They also MUST materially participate in the activity (rental activity is generally always passive, but to get this credit, you must participate).

If you know those two things above, you should be able to figure out most everything thrown your way if you logic through it. I'm sure I'm missing some minor details, but if you know those two things above, you will rarely miss questions related to passive activities.

[Anonymous]

I should add that this doesn't apply to other stuff like was mentioned above (portfolio income, regular wages, etc). The easiest way for me to think of passive income is 1) Rental activity and 2) Any business related activity (partnership, S-corp, etc).

So, passive rules are pretty much only going to apply in three scenarios. When you're dealing with rental income, partnership income, and s-corp income. I'm sure there is probably other stuff, but that's outside my scope, and hopefully outside the scope of the exam!

[Anonymous]

I find it confusing that dividend income/ interest income is not considered passive… just gona have to memorize that its portfolio and hope i dont get confused on the test.

btw @ k1zuna I am also taking REG on Aug 6! and its also my last one left!.. good luck to you!

[Author]

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