Referring to Schedule E, Part II, what is the difference between passive and non-passive K-1 income?
Sunday, July 11th, 2010 at
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StephenDoughty8840 (25)
ray @ how to make... (1)
non-passive means that you are personally a manager of the business, as well as a part owner.
passive is everything else.
Schedule K-1 is normally used for those involved in a partnership.
Passive Activity means you are not an active participant. that means that you do not materially participate in the business. There are several test regarding passive activities. A person who puts up $20,000 to start a beauty shop, but does not know where the beauty shop is: He just collects a check for chair rental every month is considered passive
Non-passive activity is one who contributes a few hours a day sweeping the hairs off the floor of the beauty shop. This is material participation and is not considered passive.
Look at the information I provided for you below:
Exhibit 4.2: Material Participation Decision Tree
Reg. 1.469-5T(a)
Is the taxpayer a material participant in a business activity?
Decision Tree
If answer to any one is yes, losses are excepted from the passive loss limitations and generally fully deductible.
Did the t/p work more than 500 hours in the activity during the year?
Did TP perform substantially all the work in the activity?
Did TP work more than 100 hours and more than anyone else (including non-owners)?
Did the taxpayer work more than 100 hours, but less than 500, in two or more businesses and the sum of all the hours in these businesses is more than 500?
Did the taxpayer materially participate in the activity for any five of the last ten years?
If the activity is a personal service activity, did the taxpayer materially participate for any three prior years?
Under all the facts and circumstances, did the taxpayer work on a regular, continuous and substantial basis in the activity? This test is not available if anyone was paid compensation in connection with management of the activity.
If answer to all the above tests is no, the taxpayer does not materially participate. The loss is passive and not deductible in the absence of passive income.
IT HAS TO DO WITH LOSS LIMITATIONS
Non-passive is monies you are physically involved in working to obtain. Passive is money making money where you do not actually do any work, such as dividends.