Los Angeles Tax Attorney Bruce Givner Discusses Passive Losses – How Material Participation Applies with Passive Losses?

by Bruce Givner on July 25, 2012

Under The Tax Reform Act of 1986, losses generated by passive activities can only be used to offset income generated by passive activities.  However, if a taxpayer materially participates in the trade or business, any losses generated are deemed not passive and therefore deductible against other income.

So what is material participation?  Reg. § 1.469-5T(a).

  • The taxpayer works 500 hours or more during the year in the activity.
  • The taxpayer does substantially all the work in the activity.
  • The taxpayer works more than 100 hours in the activity during the year and no one else works more than the taxpayer.
  • The activity is a significant participation activity (SPA), and the sum of SPAs in which the taxpayer works 100-500 hours exceeds 500 hours for the year.
  • The taxpayer materially participated in the activity in any 5 of the prior 10 years.
  • The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years.
  • Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year.

Whether a taxpayer has materially participated in an activity is determined on a year by year basis.  Additionally, a taxpayer is required to keep sufficient documentation to validate the amount of his or her participation in a trade or business activity each year.

Get Legal Help
Givner & Kaye focuses on income tax planning and asset protection plans in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles County.  On the first and third Thursday of every month, Givner & Kaye hosts its MCLE & CE accredited series - "Thursday Insights."   If you have questions regarding passive losses, call Los Angeles Tax Attorneys Givner & Kaye at (310) 207-8008 today.

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