Academic journal article Journal of Accountancy

Grouping Passive Activities

Academic journal article Journal of Accountancy

Grouping Passive Activities

Article excerpt

One technique for converting otherwise passive activities to nonpassive is grouping them and treating them collectively as a single activity, thereby combining the participation hours and improving a taxpayer's ability to achieve the necessary hours for material participation. Regs. Sec. 1.469-4 provides general rules and limitations for grouping activities and applies a facts-and-circumstances test to determine the appropriateness of a particular grouping. In general, activities can be grouped for purposes of Sec. 469 if they constitute an appropriate economic unit for measuring gain or loss.

BENEFITS AND DRAWBACKS

Grouping activities allows taxpayers to treat them as one when applying the tests to determine material participation. For example, a chef who owns two restaurants can treat them as a single activity, and if he spends 500 hours working in one of them during the year and none at the other, he will still pass the first test of the seven material participation tests under Temp. Regs. Sec. 1.469-5T(a) to be considered non-passive. Since such a move likely forms an appropriate economic unit due to common ownership and similarity in business, he can add his catering company to this group as well. If the catering company produced a loss for the year and the chef did not materially participate in it, the passive loss may be suspended to a future tax year absent any passive income to offset it against in the current year. Grouping the catering company with the restaurants as a single activity and thereby treating it as nonpassive will allow the chef to realize the tax benefit of the loss currently

However, once a taxpayer chooses a grouping, it must remain in effect for all future tax years. …

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