Section 469 - Passive activity losses and credits limited

35 Analyses of this statute by attorneys

  1. Tax Court in Brief | Rogerson v. Commissioner | Passive Income, Rent of Yachts, and Reliance on Competent Tax Counsel

    Freeman LawMay 26, 2022

    The Tax Court in Brief โ€“ May 9th โ€“ May 13th, 2022Freeman Lawโ€™s โ€œThe Tax Court in Briefโ€ covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.For a link to our podcast covering the Tax Court in Brief, downloadhere or check out other episodes of The Freeman Law Project.Tax Litigation: The Week of May 9th, 2022, through May 13th, 2022Lewis v. Commissioner, TC Memo. 2022-47| May 9, 2022 | Greaves, J. | Dkt. No. 10007-20WJackson v. Commโ€™r, T.C. Memo. 2022-50 | May 12, 2022 | Vasquez, J. | Dkt. No. 19634-18LEvert v. Commโ€™r, T.C. Memo. 2022-48| May 9, 2022 | Marshall, A | Dkt. No. 12901-19Harrison v. Commโ€™r, T.C. Memo 2022-6 | May 12, 2022 | Panuthos, J | Dkt. No. 12170-19SRogerson v. Commissioner, TC Memo. 2022-49| May 12, 2022 | Toro, J. | Dkt. No. 5848-20OpinionSummary: This deficiency case regards an evaluation of the passive activity loss rules of 26 U.S.C. ยง 469. Section 469 limits a taxpayerโ€™s use of losses generated by passive activities to offset unrelated income generated by nonpassive activities.

  2. New Opportunities to Transfer Renewable Energy Tax Credits under the IRA: What is Possible for Individuals and Pass-Through Entities

    Pillsbury Winthrop Shaw Pittman LLPSeptember 8, 2023

    TAKEAWAYSUnder the IRA, select renewable energy credits are transferrable, including to individuals and pass-through entities.The transferees of these credits are subject to the passive activity rules of Section 469 of the Internal Revenue Code, limiting who might benefit from these credits on transfer.The risk of the credits being disallowed, perhaps due to project failure, falls on the transferee and not the transferor, making appropriate indemnities and assurances as to the credit quality of the transferor paramount.On June 14, 2023, the Department of the Treasury and the Internal Revenue Service (IRS) released guidance on Internal Revenue Code (IRC) Section 6418, added as part of the Inflation Reduction Act of 2022 (P.L. 117-169)(IRA), granting taxpayers a new way to monetize certain tax credits. The guidance included proposed regulations relating to the transferability of tax credits under IRC Section 6418 (Transferability Guidance), temporary regulations regarding information and registration requirements (Pre-Filing Registration Guidance) and a series of frequently asked questions. (For a more general summary of this guidance, refer to our prior alert.) Notably, despite the hopes of tax practitioners and industry grou

  3. Tax Court in Brief | Sezonov v. Commisioner | Side Gigs and Passive Activities

    Freeman LawJason FreemanApril 29, 2022

    R.C. ยง 162.However, individual taxpayers are not allowed to deduct โ€œpassive activity losses.โ€ I.R.C. ยง 469(a)(1), (b).A โ€œpassive activity lossโ€ is the excess of the aggregate losses from all of a taxpayerโ€™s passive activities for a taxable year over the aggregate income from all of that taxpayerโ€™s passive activities during that taxable year. ยง 469(d).A โ€œpassive activityโ€ is any trade or business in which a taxpayer does not materially participate or any rental activity (regardless of whether the taxpayer materially participates in the rental activity). I.R.C. ยง 469(c)(1), (2).While most rental activity is passive, there is an exception for rental activities of a taxpayer engaged in a real property trade or business. See I.R.C. ยง 469(c)(2), (7).If a taxpayer is engaged in a real property trade or business, the material participation requirements apply.

  4. Overview of the Proposed Regulations Addressing Transferring Renewable Credits

    BakerHostetlerJeffrey ParavanoJune 27, 2023

    egulations provide much needed guidance to taxpayers that are seeking to transfer or acquire eligible credits.OverviewAs covered in our prior alerts, the Inflation Reduction Actmodified and reinstated existing renewable energy credits, enacted new renewable energy credits and enacted under ยง 6418 an election that allows eligible taxpayers to sell one-time certain credits for cash. The one-time transfer provision has the potential to provide new sources of capital to developers and owners of renewable energy projects by allowing them to monetize eligible credits through a one-time sale as opposed to a tax equity financing structure or sale-leaseback transaction.SummaryThe Treasury Department and the IRS recently published proposed and temporary regulations on the one-time transfer provisions. The proposed regulations clarify a number of uncertainties relating to the one-time transfer provisions, including as follows:The proposed regulations confirm that the passive activity rules under ยง 469 apply to transferees of credits under ยง 6418. The preamble to the proposed regulations notes that the impact of this approach is that a transferee is considered to earn eligible credits through the conduct of a trade or business related to the eligible credits that the transferee does not materially participate in. As a result, certain transferees may be required to treat the eligible credits as passive activity credits.Eligible taxpayers are able to make an election to transfer only a portion of an eligible credit and also may make transfers during a taxable year to multiple transferees.Transfers that are made for noncash consideration are invalid. The proposed regulations, however, offer minimal guidance on what does and does not constitute noncash consideration.The definition of โ€œpaid in cashโ€ is rigidly defined to mean payments made in United States dollars, including by check, cashierโ€™s check, money order, wire transfer, automated clearing house (ACH) transfer or other bank trans

  5. Court Finds All of a Taxpayerโ€™s Work for His Employer to be Personal Services in a Real Estate Business

    Miles & Stockbridge P.C.Elizabeth FialkowskiMarch 23, 2016

    Generally, a taxpayer may use losses from a passive activity only to offset income from a passive activity. I.R.C. ยง 469(a), (b). Rental activities are per-se passive activities.

  6. Tax Court Win: Stockbroker Meets Test Qualifying as Real Estate Professional

    Moskowitz LLPElizabeth PrehnApril 26, 2018

    Windham filed a petition with the U.S. Tax Court. In Tax Court, the IRS apparently argued that Windham was not a real estate professional and that she did not materially participate in her real estate activities.The material participation test First, since Windham failed to make the election to aggregate her multiple rental real estate activities together by filing a statement with her original income tax return for the taxable year 26 CFR 1.469-9 (g)(3), the court had to analyze whether she met the โ€œmaterial participation testโ€ for each piece of real estate separately. See 26 U.S. Code ยง 469(c)(7)(A), 26 CFR 1.469-9 (e)(1). Next, the court noted that under 26 CFR 1.469-5T, there are seven tests that can be used to prove that a taxpayer materially participated in an activity for the taxable year, and that three of them applied to the current case: * * * * * * * (a)(2) The individualโ€™s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year; (a)(3) The individual participates in the activity for more than 100 hours during the taxable year, and such individualโ€™s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year; [or] * * * * * * * (a)(7) Based on all the facts and circumstances (taking into account the rules in paragraph (b) of this section), the in

  7. Tax Court Allows Rental Loss Deduction to Architect Who Qualified as Real Estate Professional

    Moskowitz LLPElizabeth PrehnApril 18, 2018

    Investors are limited in their ability to offset income with passive losses, and even real estate investors who โ€œactively participateโ€ in their rentals (through management, capital improvements, selection of tenants, negotiation of leases, etc.) have a maximum $25,000 offset. However, 26 U.S. Code ยง 469(c)(7) provides special rules for real estate professionals โ€“ if you qualify, all real estate losses may be applied without limitation.How do you qualify as a โ€œreal estate professionalโ€? Taxpayers generally have the burden to prove that they are entitled to a deduction that they have claimed, and 26 CFR 1.469-5T(f)(4) lists the types of evidence that is admissible.

  8. Partnership Losses But No Outside Basis? Too Bad

    Rivkin Radler LLPLouis VlahosJuly 27, 2023

    addition, a partnerโ€™s personal guarantee or assumption of a partnership liability to a third party may generate outside basis, but the partner may not be in a position to utilize these options.The partner who purchases a partnership interest from another partner, even for an installment note, will receive a cost basis in such interest against which partnership losses may be deducted.Finally, the acceleration of partnership income or the deferral of deductions or distributions may assist in giving the partner outside basis for purposes of absorbing losses.In reviewing the available alternatives, it will behoove a partner facing the possible disallowance of loss deductions to consult with their tax adviser. Before committing to any course of action, however, it is imperative that the alternative also make sense from a business perspective.The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm. Pub. L. 99-514. Tax shelters. IRC Sec. 469. The passive loss rules limit deductions from passive trade or business activities. These loss rules apply to individuals, estates and trusts, and closely held corporations. A passive activity is a trade or business activity in which the taxpayer (a) owns an interest, but (b) does not materially participate. A taxpayer is treated as materially participating in an activity if they are involved in the operation of the activity on regular, continuous, and substantial basis. IRC Sec. 465. Sometimes for better, other times for worse, depending on oneโ€™s perspective. Pub. L. 115-97. IRC Sec. 461(l). The excess business loss rules limit the ability of an individual taxpayer โ€“ including an individual partner in a partnership โ€“ to apply their losses from an operating business (including a partnerโ€™s distributive share of partnership business loss) for a taxable year against, for example, their investment income for such year. The amount of such loss that is disallowed for a year is treated as pa

  9. The Choice of Entity Decision for VC Financed Start-ups

    Frost Brown Todd LLCScott W. DolsonApril 3, 2019

    Discounting of the value of loss pass-through returns to the point that VCs are entrepreneurial by nature and entrepreneurs are optimists by nature. Some commentators have suggested that VCs suffer from irrational exuberance, a gambler's mentality that leads them to overestimate their likelihood of success (hence the discounting of the value of losses);even if the tax benefits associated with the pass-through of losses favors the LLC, the reality is that the passive loss rules (IRC ยง 469) often act to block the deduction of losses;VCs don't want to deal with the complexities of partnership taxation, reporting start-up company losses on their tax returns and potentially being required to file tax returns in multiple states, all of which are associated with a pass-through entity, and not with a C corporation;holders of pass-through equity always risk being allocated "phantom income" (i.e., allocation of net profits without a corresponding tax distribution). There is no phantom income risk associated with holding C corporation stock;the strategy of starting-up as an LLC taxed as a partnership during the early years to permit loss pass-through and then converting to a C corporation is expensive and requires a good deal of expertise on the part of the professionals handling the transaction;equity compensation is more difficult, complex and expensive to draft and administer with the LLC than it is with the C corporation.

  10. Vacation Homes and Taxation

    Pessin Katz Law, P.A.July 6, 2015

    Yes, if the annual personal use of the property doesnโ€™t exceed the greater of 14 days or 10% of the days the property is rented out during the year at a fair rental. The ownerโ€™s deductions are restricted by the IRC ยง469 passive loss rules, not by the vacation home rules.Rental portion. When a vacation home is treated as rental property, its income and deductions generally are automatically treated as passive in nature, subject to certain exceptions.