Passive Activity Loss Rules: Strategies for Pass- Throughs to - PowerPoint PPT Presentation

presents presents Passive Activity Loss Rules: Strategies for Pass- Throughs to Maximize Deductions g Leveraging Federal Guidance and Rulings to Establish Material Participation A Live 110-Minute Teleconference/Webinar with Interactive Q&A A Live 110-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Steven Schneider, Director, Tax Group, Tax Goulston & Storrs , Washington, D.C. Carolyn R. Turnbull, Director of Tax, Moore Stephens Tiller , Atlanta Noel Brock, Partner, Partnership Technical Tax Practice Leader, Grant Thornton , Washington, D.C. N l B k P t P t hi T h i l T P ti L d G t Th t W hi t D C Thursday, June 24, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations.

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Passive Activity Loss Rules: Strategies For Pass Throughs Strategies For Pass-Throughs To Maximize Deductions W bi Webinar June 24, 2010 Steven Schneider, Goulston & Storrs Carolyn Turnbull, Moore Stephens Tiller cturnbull@mstiller.com sschneider@goulstonstorrs.com Noel Brock, Grant Thornton noel.brock@gt.com

Today’s Program Relevance Of Passive Activity Loss Rules Slides 6-8 ( Steven Schneider ) Passive Activity Loss Rules Under The IRC Slides 9-41 ( Carolyn Turnbull Steven Schneider Noel Brock ) ( Carolyn Turnbull, Steven Schneider, Noel Brock ) Special Impacts On Real Estate Professionals Slides 42-52 ( Carolyn Turnbull ) Recent Passive Activity Loss Developments Slides 53-69 ( Carolyn Turnbull ) Best Practices And Tax Planning Tips i d l i i Slides 70-71 lid ( Carolyn Turnbull, Steven Schneider, Noel Brock ) 5

Relevance Of Passive A ti it L Activity Loss Rules R l Steven Schneider, Goulston & Storrs Steven Schneider, Goulston & Storrs

Introduction To Passive Activity Rules Relevance under new Sect. 1411 3.8% Medicare tax  Starting in 2013, a 3.8% Medicare tax on net investment St ti i 2013 3 8% M di t t i t t – income from trade or business that is (a) not a §469 passive activity, and (b) trading in financial instruments or commodities commodities Recent problems with audits of real estate  professionals 7

Introduction To Passive Activity Rules Issues with IRS recharacterizing income and  losses The IRS has special rules to recharacterize passive – income to non-passive income and non-passive income to non-passive income and non-passive losses to passive losses.  Examples – Self-charged rent – Self-charged interest – Special rules for certain dispositions 8

Passive Activity Loss R l Rules Under The IRC U d Th IRC Carolyn Turnbull, Moore Stephens Tiller Steven Schneider, Goulston & Storrs Steven Schneider, Goulston & Storrs Noel Brock, Grant Thornton

General Rules: IRC §469 Passive activity loss and credit disallowed A t A taxpayer may only deduct a passive activity loss or utilize a l d d t i ti it l tili  passive activity credit against the taxpayer’s passive activity income for any given taxable year. Any passive activity loss or credit which is disallowed for a taxable – year is carried forward and treated as a credit or deduction allocable to the passive activity in the following taxable year. Suspended losses and credits from an activity are allowed in full S d d l d dit f ti it ll d i f ll – upon a taxable disposition of the activity. If any passive losses are not deductible in any given year, the – amount of the suspended losses from each passive activity is amount of the suspended losses from each passive activity is determined on a pro rata basis. 10

General Rules: IRC §469 (Cont.) Taxpayers to whom the passive activity rules apply The passive activity limitations apply to the following taxpayers:  An individual, estate or trust; – A closely held C corporation; and – A personal service corporation – 11

General Rules: IRC §469 (Cont.) Publicly traded partnerships The passive loss rules are applied separately with respect to each The passive loss rules are applied separately with respect to each  publicly traded partnership. Each partner in a publicly traded partnership treats loss (if any) from the partnership as separate from income and loss from any other publicly traded partnership, and also as separate y p y p p p from any income or loss from passive activities. Net income from publicly traded partnerships – Net losses and credits attributable to the interest in the publicly traded – partnership Treatment of suspended losses and credits  Disposition of a publicly traded partnership (or an activity in a publicly traded – partnership) partnership) Non-application of the publicly traded partnership separate entity rule to the – low-income housing credit or the rehabilitation credit 12

General Rules: IRC §469 (Cont.) Calculation of the passive activity loss and passive activity credit y A taxpayer’s passive activity loss for a particular taxable year is equal to  the amount (if any) by which: The taxpayer’s aggregate loss from all passive activities for the taxable year – exceeds exceeds The aggregate income from all passive activities for the year – A taxpayer’s passive activity credit for a particular taxable year is equal  to the amount by which: y The sum of all of the taxpayer’s credits from all passive activities allowable – for the taxable year under Subpart D of part IV of subchapter A of the Internal Revenue Code, or  Subpart B (other than §27(a)) of such part IV) exceeds Subpart B (other than §27(a)) of such part IV) exceeds   The taxpayer’s regular tax liability for the taxable year which is allocable to all – passive activities 13

General Rules: IRC §469 (Cont.) Allocation of passive activity loss and credit A taxpayer's passive activity loss $25 000 offset for rental real A taxpayer s passive activity loss, $25,000 offset for rental real estate and passive activity credit are allocated to all activities, and within activities, on a pro rata basis as provided under regulations. regulations. 14

General Rules: IRC §469 (Cont.) Definition of passive activity G General rule l l A passive activity is any activity : ti it : A i ti it i  Which involves the conduct of a trade or business, , – And in which the taxpayer does not materially participate – 15

General Rules: IRC §469 (Cont.) Definition of passive activity Trade or business activities Trade or business activities Trade or business activities are activities that:  Involve the conduct of a trade or business (within the meaning of – §162) §162), Are conducted in anticipation of the commencement of a trade or – business, or Involve research or experimentation expenditures that are deductible – under §174 (or would be deductible if the taxpayer adopted the under §174 (or would be deductible if the taxpayer adopted the method described in §174(a)) Trade or business activities do not include:  Rental activities, or – Activities that are treated under §1.469-1T(e)(3)(vi)(B) as incidental A ti iti th t t t d d §1 469 1T( )(3)( i)(B) i id t l – to an activity of holding property for investment 16

General Rules: IRC §469 (Cont.) Definition of passive activity Exclusions Exclusions Working interests in oil and gas property  Activity of trading personal property for the account of owners of  interests in the activity (without regard to whether such activity is a trade interests in the activity (without regard to whether such activity is a trade or business activity) Compensation for personal services  Portfolio income  Interest and dividends Interest and dividends – Gain on sale of stocks and bonds – Gain on sale of investment property – Income from leased land and land held for investment  Income from property rented to an activity in which the taxpayer I f t t d t ti it i hi h th t  materially participates. Lottery winnings  17