Passive losses suspended losses de fi ned suspended

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Passive Losses: Suspended Losses Defined Suspended losses are losses that were incurred during a tax year but were not deductible because of the 9. passive loss restrictions. Suspended losses can offset nonpassive income when a qualified disposition of an entire interest of a passive activity has occurred. They can also offset nonpassive income upon the transfer of a passive activity by reason of death. Passive Losses: Suspended Losses—Transfers on Death Suspended losses are deductible by the decedent when a passive activity is transferred by reason of death to 10. the extent that the excess of the fair market value (stepped-up basis) in the hands of the transferee over the decedent’s adjusted basis is less than the amount of suspended loss. Passive Losses: Suspended Losses—Transfers by Gift Suspended losses from passive activities that are transferred by gift are not deductible. Instead the entire 11. suspended loss is added to the donee’s basis. Passive Losses: Taxpayers Subject to Rules Taxpayers affected by the passive loss rules are individuals, estates, trusts, closely held C corporations, and 12. personal service corporations. Closely held corporations are able to offset passive losses with active income but not portfolio income. Passive Losses: Material Participation Defined Material participation is the involvement of a taxpayer in the operations of an activity on a regular, 13. continuous, and substantial basis. The determination of material participation is important because it may establish whether an activity will be characterized as a passive activity or a nonpassive activity. Passive Losses: Material Participation Tests The seven tests (abbreviated) to establish material participation are applied during the year and are as 14. follows: Participating more than 500 hours. (1) Substantially all of the participation in an activity (regardless of hours). (2) Participating more than 100 hours and more than any other individual. (3) Significant participation with more than 500 hours in all significant participating activities. (4) Material participation in any five taxable years during the 10 preceding taxable years. (5) Material participation in any three taxable years preceding the taxable year for a personal service (6) activity. Regular, continuous, and substantial participation based on facts and circumstances. (7) Passive Losses: Significant Participation Significant participation requires more than 100 hours of participation, but not to the point of satisfying 15. the material participation requirements of the other six tests. If participation in all significant participating activities exceeds 500 hours, then all such activities become material participating activities. Passive Losses: Undertakings and Separate Source of Income Production An undertaking is the smallest portion of a profit-seeking endeavor that can constitute an activity. A 16.

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