What type of taxpayers (entities) are affected by the passive loss rules? What is the significance of

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What type of taxpayers (entities) are affected by the passive loss rules? What is the significance of a closely held corporation with regard to the deductibility of passive losses?

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The passive loss rules also known as the passive activity loss rules primarily affect individual taxpayers estates trusts personal service corporations and closely held corporations These rules were enacted to limit the ability of taxpayers to offset income from active business or investment activities with losses from passive activities Passive activities are generally those in which the taxpayer does not materially participate Heres how different types of entities are affected by the passive loss rules Individual Taxpayers Individual taxpayers are directly impacted by the passive loss rules Passive losses from one activity cannot be directly used to offset income from other nonpassive activities such as wages or business income unless certain criteria are met Estates and Trusts Estates and trusts are subject to the passive loss rules The rules apply to activities conducted by estates and trusts in a manner similar to how they apply to individual taxpayers Personal Service Corporations PSCs Personal service corporations which are corporations that provide personal services in the fields of health law engineering architecture accounting actuarial science performing arts or consulting are subject to the passive loss rules However the rules for PSCs have some modifications and are not as restrictive as those for other corporations Closely Held Corporations Closely held corporations which are typically corporations with a limited number of shareholders and often familyowned may face limitations on the deductibility of passive losses The significance lies in the potential for passive losses to be suspended if the closely held corporation ...View the full answer

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