7902 / Are equipment leasing activities subject to the passive loss rules? If so, what is the effect to an investor in an equipment leasing program?

Yes, rental activities will generally be considered passive activities subject to the passive loss rules. Even if substantial services are provided, so that the equipment leasing activity is not considered a rental activity, the investor usually will not materially participate in the program. As a result, the investor in such a program will generally be subject to the passive loss rules (see Q 8010 to Q 8021). However, an entity taxed as a C corporation typically is not subject to the passive loss rules (see Q 8010).

In general, the rules limit the amount of the taxpayer’s aggregate deductions from all passive activities to the amount of aggregate income from all passive activities; passive credits can be taken against only tax attributable to passive activities. The rules are applied separately in the case of a publicly traded partnership; aggregation is permitted only within the partnership. The rules are intended to prevent taxpayers from offsetting salaries, interest, dividends, and other positive income with losses from passive activities. The benefit of the disallowed passive losses and credits is not altogether lost, but rather is postponed until such time as the taxpayer has additional passive income or disposes of the activity (see Q 8010 to Q 8021).