Grouping Passive Activities – IRS Rev Proc 2010-13 - John R. Dundon II, Enrolled Agent
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Grouping Passive Activities – IRS Rev Proc 2010-13

The Perturbing New Treatment of Patents Under the Tax Cut & Jobs Act (TCJA)

Grouping Passive Activities – IRS Rev Proc 2010-13

This new IRS Revenue Procedure is hugely important. Beginning in tax years after 1/24/2010 the IRS is requiring a written statement to accompany the tax return that lists how passive investment activities are grouped. The statement must include your name, address, employer ID #, and/or social security #, and it must state clearly ‘grouped activities are an appropriate economic unit.’ This statement is only required once in the initial year of the grouping. But the statement must be kept with a copy of your tax return. This rule applies to IRS forms 1040, 1041, 1065, 1120S. Basically taxpayers avoid passive loss limitations by grouping business or rentals as one activity. Reg 1.469-4 allows for related businesses or rentals to form a single activity.

Why group?

If several business entities form a single activity it is easier as an owner to materially participate. It is easier to work over 500 hours in a tax year among several entities if they are grouped together. If each entity is a separate activity, you may not have enough hours to materially participate in each. Grouping may mean that you escape passive loss limitations. Interestingly enough you only need one or two interdependency factors to demonstrate proper grouping. If there are no interdependencies found however the activities cannot be grouped.

When you might want to group activities:

  1. If you have related businesses where one has losses
  2. When you have a business and related rental real estate (only if both investments are owned in identical percentage or are insubstantial)
  3. If you have a business and related equipment lease such as an airplane (only if both investments are owned in identical percentage or are insubstantial)
  4. If you have several condo units in the same complex

When you might not want to group activities:

  1. If you have a business with passive income and you do not materially participate
  2. IF you have a business that is expected to be profitable in the near future.
  3. If you have a business and rental real estate if the rental real estate has net income. Remember self rented income is always non-passive.
  4. If you have a business with suspended losses and net income not anticipated.

 



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