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Table of Contents

List of Forms by Chapter

Chapter 1 — Considerations In Electing S Corporation Status

Chapter 2 — Electing S Corporation Status

Chapter 3 — Operating and Maintaining the S Corporation

Chapter 4 — Passive Loss Rules: Application to an S Corporation and Its Shareholders

I. [4.1] Introduction

II. [4.2] Background

III. [4.3] Applying the Regulations

[4.4] What the Taxpayer Is Trying To Determine

[4.5] Passive Activity Losses Checklist

[4.6] Step One — Determine Whether the Taxpayer Is Subject to Internal Revenue Code §469

[4.7] Step Two — Determine the Separate Activities of the Taxpayer

[4.8] General Activity Rules

[4.9] Grouping Activities

[4.10] Limitations on Grouping Rental Activities

[4.11] Activities of Certain Limited Partners and Limited Entrepreneurs

[4.12] Activities Conducted Through Entities

[4.13] Consistency Requirements

[4.14] Certain Trading Activities

[4.15] Grouping by the Internal Revenue Service To Prevent Tax Avoidance

[4.16] Reporting Groupings

[4.17] Step Three — Determine Whether the Taxpayer Materially Participates

[4.18] Participation

[4.19] Material Participation Tests

[4.20] Significant Participation

[4.21] Personal Service Activity

[4.22] Facts and Circumstances Test

[4.23] Step Four — Determine Whether the Activity Is a Rental Activity

[4.24] Exceptions to General Rule

[4.25] Average period of customer use

[4.26] Average customer use of seven days or less

[4.27] Average customer use of 30 days or less with significant personal services

[4.28] Extraordinary personal services are provided

[4.29] Rental incidental to non-rental activities

[4.30] Property customarily made available for nonexclusive use by various customers

[4.31] Property provided to partnership or S corporation in which taxpayer owns an interest

[4.32] Exception for Rental Real Estate Activities of Real Estate Professionals

[4.33] Limited Exception for Active Participation in Rental Real Estate

[4.34] Step Five — Eliminate Nonpassive Income

[4.35] Portfolio Income

[4.36] Personal Service Income

[4.37] Self-Charged Items

[4.38] Gross Income from Oil and Gas Properties

[4.39] Additional Exclusions from Passive Activity Gross Income

[4.40] Step Six — Determine Applicability of Recharacterization Rules

[4.41] Significant Participation

[4.42] Non-Depreciable Rental Property

[4.43] Interest Income from Passive Equity-Financed Lending Activity

[4.44] Income from Property Rented Incidental to Development Activity

[4.45] Self-Rented Property

[4.46] Pass-Through Entities Licensing Intangible Property

[4.47] Additional Situations Subject to Recharacterization

[4.48] Substantially appreciated property formerly used in nonpassive activity

[4.49] Qualified working interests in oil and gas

[4.50] Active participation rental real estate

[4.51] Step Seven — Calculate the Passive Loss

[4.52] Calculate Passive Activity Deductions

[4.53] Calculate Passive Activity Gross Income

[4.54] Gain from disposition of an interest in an activity or an interest in property used in an activity

[4.55] Income from Internal Revenue Code §481 adjustments

[4.56] Overall Net Loss

[4.57] Net Loss for Each Activity

[4.58] Loss Carryover

[4.59] Step Eight — Apply Passive Activity Losses Following Disposition of an Activity

[4.60] Sales

[4.61] Gifts

[4.62] Inheritance

[4.63] Former Passive Activities

[4.64] Partial Dispositions

[4.65] Installment Sales

[4.66] Disposition of Interest in Pass-Through Entity

[4.67] Conversion of C Corporation to S Corporation

[4.68] Mark-to-Market Election

[4.69] Treatment of Passive Activity Credits

IV. [4.70] Conclusion

Authors

Paul S. Drizner
Paul S. Drizner
Paul S. Drizner is a Partner in the Chicago office of Seyfarth Shaw LLP, where he concentrates his practice in taxation. Mr. Drizner is a member of the American and Chicago Bar Associations. He received his B.S. from the University of Illinois and his J.D. from Loyola University Chicago School of Law, where he served as an editor on the Loyola University Chicago Law Journal.
Anthony J. Jacob
Anthony J. Jacob
Anthony J. Jacob is a Partner at Hinshaw & Culbertson LLP in Chicago and currently serves as the practice group leader of Hinshaw’s Commercial Transactions Practice Group. He provides general corporate and commercial lending legal counsel, which includes advising businesses of every size — from startups and privately held companies to multinational corporations — with cyber and privacy risks. He is a member and former Chair of the Business & Securities Law Section of the Illinois State Bar Association, a Board Member of the Institute of Illinois Business Law at Chicago-Kent College of Law, and a member of the Defense Research Institute’s Regulatory/Transactional Focus Group Membership Initiative. Mr. Jacob received his J.D. and his LL.M. from the University of Illinois Chicago School of Law.
Alexander Loftus
Alexander Loftus
Alexander Loftus is a Partner at Loftus & Eisenberg, Ltd., in Chicago, where he focuses his practice on business litigation. Loftus has been named a Super Lawyer and is a member of the Illinois Trial Lawyers Association, the Illinois State Bar Association, and the Small Business Advisory Counsel. He received his J.D. from DePaul College of Law.
William A. Price
William A. Price
William A. Priceis an attorney in private practice at growthlaw.com, in Warrenville, and focuses his practice on business, securities, and administrative law. Mr. Price was the 2012 recipient of the ISBA Section of General Practice’s Tradition of Excellence Award. He is a member and Past Chair of the Institute of Illinois Business Laws and the Illinois State Bar Association’s Section of Business and Securities Law and Section of Administrative Law. Mr. Price helped draft the Illinois Business Corporations Act, the Illinois Limited Liability Companies Act, the Illinois Limited Partnerships Act, the Illinois Uniform Partnerships Act, and the Illinois Not for Profit Corporations Act. He earned his J.D. and M.A. from Duke University and his A.B. magna cum laude from the University of Illinois Urbana-Champaign. He was also a Fellow at Deutsche Akademische Austauschdienst Fellow, Albert-Ludwigs Universitaet, Freiburg Im Breisgau, Germany.

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S Corporations 2022 Edition

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