What is the Impact of a Passive Activity classification?
The impact of a Passive Activity classification are that the passive losses are subject to passive loss rules and income limitations.
1. Passive Losses would be deductible only to the extent that the taxpayer has income from other passive activities to offset these losses, or when the taxpayer disposes of the entire activity.
2. Furthermore, Passive Losses are subject to a taxpayers Adjusted Gross Income as well.
If a taxpayer has passive losses that are not deductible in the current year, these losses can be carried forward to the following year, subject to the same passive loss rules and limitations. The IRS requires that taxpayers maintain “detailed records as to the time they spend on a particular activity, particularly when they participate in several activities.”