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Income that includes wages, salary, commissions, bonuses, profits from a trade or business in which the taxpayer is a material participant, gain on the sale or other disposition of assets used in an active trade or business, and income from intangible property if the taxpayer’s personal efforts significantly contributed to the creation of the property. The passive activity loss rules require classification of income and losses into three categories with active income being one of them.
At risk limitation
- Generally, a taxpayer can deduct losses related to a trade or business, S corporation, partnership or investment asset only to the extent of the at risk amount.
Closely held corporation
A corporation where stock ownership is not widely dispersed. Rather, a few shareholders are in control of corporate policy and are in a position to benefit personally from that policy.
Extraordinary personal services-
Services provided by individuals where the customers’ use of the property is incidental to their receipt of the services. For example a patient’s use of a hospital bed is incidental to his or her receipt of medical services. This is one of the six exceptions to determine whether an activity is a passive rental activity.
Consisting of virtually the same elements as portfolio income, a measure by which to justify a deduction for interest on investment indebtedness
if an individual taxpayer materially participates in a non rental trade or business activity, any loss from that activity is treated as an active loss that can be offset against active income. Material participation is achieved by meeting any one of seven tests provided in the regulations
Net investment income
- The excess of investment income over investment expenses. Investment expenses are those deductible expenses directly connected with the production of investment income. Investment expenses do not include investment interest. The deduction for investment interest for the tax year is limited to net investment income.
- Any loss from (1) activities in which the
- taxpayer does not materially participate or (2) rental activities (subject to
- certain exceptions). Net passive losses cannot be used to offset income from
- nonpassive sources. Rather, they are suspended until the taxpayer either
- generates net passive income (and a deduction of such losses is allowed) or
- dispose of the underlying property (at which time the loss deductions are
- allowed in full). One relief provision allows landlords who actively
- participate in the rental activities to deduct up to 25000 of passive losses
- annually. However, a phase-out of the 25000 of amount commences when the
- landlord’s AGI exceeds 100,000. Another relief provision applies for material
- participation in a real estate trade or business.