Proof of participation.

You may prove your participation in an activity by any reasonable means. You don’t have to maintain contemporaneous daily time reports, logs, or similar documents if you can establish your participation by other reasonable means. For this purpose, reasonable means include, but aren’t limited to, identifying services performed over a period of time and the approximate number of hours spent performing the services during that period, based on appointment books, calendars, or narrative summaries.

Tests for individuals.

You materially participated for the tax year in an activity if you satisfy at least one of the following tests.

Test for a spouse.

Participation by your spouse during the tax year in an activity you own may be counted as your participation in the activity, even if your spouse didn’t own an interest in the activity and whether or not you and your spouse file a joint return for the tax year.

Test for investors.

Work done as an investor in an activity isn’t treated as participation unless you were directly involved in the day-to-day management or operations of the activity. For purposes of this test, work done as an investor includes:

Special rules for limited partners.

If you were a limited partner in an activity, you generally didn’t materially participate in the activity. You did materially participate in the activity, however, if you met material participation test 1, 5, or 6 (see Tests for individuals, earlier) for the tax year.

However, for purposes of the material participation tests, you aren’t treated as a limited partner if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during the portion of the partnership's tax year in which you directly or indirectly owned your limited partner interest).

Special rules for certain retired or disabled farmers and surviving spouses of farmers.

Certain retired or disabled farmers and surviving spouses of farmers are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent. See Temporary Regulations section 1.469-5T(h)(2).

Estates and trusts.

The PAC limitations apply to an estate or trust. See Temporary Regulations sections 1.469-1T(b)(2) and (3). The rules for determining material participation for this purpose haven’t yet been issued.

Regrouping due to net investment income tax.

You may be able to regroup your activities if you’re subject to the Net Investment Income Tax (NIIT) for the first time. For detailed information, see Pub. 925 and Regulations section 1.469-11(b)(3)(iv).

Limitation on grouping certain activities.

The following activities may not be grouped together.

Activities conducted through partnerships, S corporations, and C corporations subject to section 469.

Once a partnership or corporation determines its activities under these rules, a partner or shareholder may use these rules to group those activities with:

A partner or shareholder may not treat as separate activities those activities grouped together by the partnership or corporation.

Partial disposition of an activity.

You may treat the disposition of substantially all of an activity as a separate activity if you can prove with reasonable certainty:

New grouping.

You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules.

Addition to an existing grouping.

You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules.

Regrouping.

You must file a written statement with your original income tax return for the tax year in which you regroup the activities. The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. In addition, the statement must contain an explanation of why the original grouping was clearly inappropriate or the nature of the material change in the facts and circumstances that made the original grouping clearly inappropriate.

Form 3800, General Business Credit.

Enter the credits from Form 3800, lines 2, 23, and 32, in column (a) of Worksheet 1, 2, 3, or 4.

Form 8834, Qualified Electric Vehicle Credit.

See the Instructions for Form 8834 for the amount to enter in column (a) of Worksheet 1 or 4.

Lines 1a through 1c.

Individuals and qualifying estates that actively participated in rental real estate activities must include the credits (other than rehabilitation credits or low-income housing credits) from these activities on lines 1a through 1c. Use Worksheet 1 to figure the amounts to enter on lines 1a and 1b.

See Part II—Special Allowance for Rental Real Estate Activities With Active Participation, later.

If you are married filing a separate return and lived with your spouse at any time during the year, even if you actively participated in the rental real estate activity, include the credits in Worksheet 4, not in Worksheet 1.

Note.

You may take credits that arose in a prior tax year (other than low-income housing and rehabilitation credits) under the special allowance only if you actively participated in the rental real estate activity for both that prior year and this year. If you didn’t actively participate for both years, include the credits in Worksheet 4, not in Worksheet 1.

Lines 2a through 2c.

Individuals (including limited partners) and qualifying estates who had rehabilitation credits from rental real estate activities or low-income housing credits for property placed in service before 1990 must include the credits from those activities on lines 2a through 2c. Use Worksheet 2 to figure the amounts to enter on lines 2a and 2b.

If you have low-income housing credits for property placed in service after 1989, include those credits in Worksheet 3 instead of Worksheet 2. If you held an indirect interest in the property through a partnership, S corporation, or other pass-through entity, use Worksheet 3 only if you also acquired your interest in the pass-through entity after 1989.

Lines 3a through 3c.

Individuals (including limited partners) and qualifying estates who had low-income housing credits from rental real estate activities for property placed in service after 1989 must include those credits on lines 3a through 3c. If you held an indirect interest in the property through a partnership, S corporation, or other pass-through entity, use lines 3a through 3c only if you also acquired your interest in the pass-through entity after 1989. Use Worksheet 3 to figure the amounts to enter on lines 3a and 3b.

Include the credits in Worksheet 4, but not in Worksheet 2 or 3, if you are married filing a separate return and lived with your spouse at any time during the year.

Lines 4a through 4c.

Individuals must include on lines 4a through 4c credits from passive activities that weren’t entered on Worksheets 1, 2, or 3. Trusts must include credits from all passive activities in Worksheet 4. Use Worksheet 4 to figure the amounts to enter on lines 4a and 4b.

Line 6.

If Form 8582, line 3, shows net income or you didn’t complete Form 8582 because you had net passive income, you must figure the tax on the net passive income. If you have an overall loss on an entire disposition of your interest in a passive activity, reduce net passive income, if any, on Form 8582, line 3, to the extent of the loss (but not below zero) and use only the remaining net passive income in the computation below. If you had a net passive activity loss, enter -0- on line 6 and go to line 7.

Figure the tax on net passive income as follows.

Line 7.

If line 7 is zero because the tax on the net passive income on line 6 is greater than your credits from passive activities on line 5, all your credits from passive activities are allowed. In this case, enter the amount from line 5 on line 37 and report the credits on the forms normally used. Don’t complete Worksheets 5 through 9.

Line 35.

Figure the tax attributable to the remaining special allowance as follows.

Line 37.

If you have only one type of credit, the amount on line 37 is the credit allowed for the year. Enter this amount on the form where it is normally reported. See Reporting Allowed Credits on Your Tax Return, later. Your unallowed credit is line 5 minus line 37.

Use Worksheets 5 through 9, whichever apply, to allocate the allowed and unallowed credits if you have credits from more than one activity. Also use the worksheets if you have more than one type of credit.

Keep a record of each unallowed credit and the activity to which it belongs so you may claim the credit if it becomes allowable in a future year.

Line 38.

Check the box if you elect to increase the basis of credit property used in a passive activity by the unallowed credit that reduced the property's basis. The election is available for a fully taxable disposition of an entire interest in an activity for which a basis adjustment was made as a result of placing in service property for which a credit was taken. You may elect to increase the basis of the credit property immediately before the disposition (by an amount no greater than the amount of the original basis reduction) to the extent that the credit hadn’t been allowed previously because of the passive activity credit limitations. The amount of the unallowed credit that may be applied against tax is reduced by the amount of the basis adjustment.

No basis adjustment may be elected on a partial disposition of your interest in a passive activity or if the disposition isn’t fully taxable. The amount of any unallowed credit, however, remains available to offset the tax attributable to net passive income.