Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
Passive Activity and At-Risk Rules
Passive activity rules and at-risk rules are desinged to limit the amount of a business loss that may be deducted in a given tax year from other sources of income.
- Passive Activity Rules
- At-Risk Rules
- Bsis
Passive Activity Rules
Passive activity rules prevent investors from deducting passive activity losses from their non passive sources of income. In other words, passive losses may only be deducted from passive income. For example, a loss from a partnership in which you're a limited partner may not be deducted from your salary earned at a company in which you are an employee.
The passive activity rules (Section 469, Passive Activity Losses and Credits Limited) were enacted into law with the passage of the Tax Reform Act of 1986, which was a major tax-law overhaul. Passive activity rules deal with participation in a business and apply to investors who do not materially participate in the activities or the management of the businesses that they invest in. Such investors simply expect a return on their investment.
Although non-real estate businesses that you merely invest in but do not materially participate in are passive activities, rental real estate activities for real estate non-professionals are also considered passive activities, regardless of your participation in the rental activity.
Suspended Losses:
If passive activity losses exceed passive activity income in a given year, the excess amount of the loss is carried over to future tax years indefinitely until such loss may be deducted from passive activity income of a future year.
Active Participation:
Generally, if you participate at least 500 hours per year (10 hours per week) in your business, you're not subject to the passive activity rules. If you rent out real estate, such as a condo or private residence and you're not a real estate professional, you don't have to count hours of participation to determine active participation.
Rental Real Estate:
To enjoy the write-off from rental property, such as a condo or private residence, real estate non-professionals must actively participate in the management of the property, such as setting the terms of the lease, approving prospective tenants, approving expenses for repairs and maintenance. A real estate non-professional may also deduct the cost of using a property management company, which may collect rent and coordinate repairs.
At-Risk Rules
The Tax Reform Act of 1986 also extended the at-risk rules to property placed in service after 1986. At-risk rules deal with your investment in a business and not your participation.
This means, your share of a businesss loss in a given year, which is passed through the entity to you and which you may deduct on you individual income tax return, is limited to the amount of your investment in the business. In other words, you may deduct a business loss from a passive activity up to amount of your investment in the acitivity you stand to lose.
The nondeductible portion of the loss, is called a suspended loss and may be carried over to future years indefinitely, until you have is sufficient basis to absorb the loss.
Historical Note
Before passage of the Tax Reform Act of 1986 (TRA 1986), a variety of speculative and questionable tax shelters were created involving highly leveraged (the use of borrowed funds) real estate activities. These tax-shelters were set up as limited partnerships and offered investors the promise of tax savings in excess of their economic investment in the activity. High-income taxpayers tended to be the primary investors attracted to these tax-shelter schemes.
Tax savings were achieved by these investors by passing losses and deductions through these passt-through entities to the individual investors, who would deduct their share of these losses and deductions from their other sources of income reported on their individual income tax return.
Ultimately, the tax savings from their write-offs would generally be greater than the amount of their economic investment in the activity. In other words, rather than real economic incentives being the motivating factor for investing in these tax-shelters (i.e. the prosptect of the entity being profitabile), the promise of tax savings was the key incentive.
Congress recognized the inequity of these real estate tax-shelter schemes and how they resulted in unsound investment and unproductive use of investment capital. Although the at-risk rules were passed in 1976 and applied to a variety of industries, the real estate industry was excluded from being subject to that legislation. The powerful real estate lobby played a role in getting this exclusion.
However, the TRA '86 finally expanded the TRA '76 to apply the at-risk rules to the real estate industry. It's passage eliminated the incentive for taxpayers to invest in real estate tax-shelters designed merely to generate tax savings and which lacked real economic substance.
At-Risk Rules vs Passive Activity Rules
The key distinctions between the at-risk rules and passive activity rules are, the at-risk rules deal with your investment in an activity while the passive activity rules deal with your participation in an activity.
The passive activity and at-risk rules are intended to have the effect of directing capital investment into viable, economic activities, where profit is the motivating factor and getting a return on investment, and not merely generating tax savings via sham tax shelters and financial finagling.