To calculate a member's self-charged interest income that is recharacterized as passive income, the member's interest income from a loan to the LLC is multiplied by his or her passed-through share of the LLC's passive interest expense deductions from all member loans (including loans by other members) and divided by the greater of (1) that member's passed-through share of interest expense deductions from all member loans used for passive activities
or otherwise, or (2) that member's interest income from all loans to the LLC.
469(d)(1) defines the term "passive activity loss" as the amount by which the aggregate losses from all passive activities
exceed the aggregate income from all passive activities
for the year.
Rentals are generally passive activities
, meaning that they are not treated as a trade or business and are not subject to self-employment taxes.
* Passive activities
include trade or business ventures in which you do not materially participate; that is, you are not involved in the operation of the activity on a regular, continuous and substantial basis.
Typically, losses from a taxpayer's passive activities
can be deducted only to offset income from other passive activities
The definition of passive activity provided by IRC section 1411(c)(2) makes reference to IRC section 469 for further guidance, which defines passive activities
as any activity involving the conduct of a trade or business in which the taxpayer does not materially participate.
Under the passive loss rule, aggregate losses from "passive" activities (see Q 7914) may generally be deducted in a year only to the extent they do not exceed aggregate income from passive activities
in that year; credits from passive activities
may be taken against tax liability allocated only to passive activities
The passive activities
and at-risk rules provide hurdles that taxpayers must overcome in order for certain losses to offset other sources of income in a given year.
* Nature--Does the design incorporate nature, light, gardens, and exterior spaces for both active and passive activities
: The Technical Explanation, Page 44, further states that the new law "clarifies that the election to mark to market an interest in a passive activity does not result in the deduction of suspended losses by reason of section 469(g)(1)(A)." Also see IRS Notice 2002-29, IRB 2002-17, April 29, 2002, to this effect.
included watching television, talking on the phone, and going to church.
Section 469(c)(2) also classifies all rental activities as passive activities
, regardless of whether the taxpayer materially participates in the activity.