Tax Facts

8020 / How are suspended passive losses treated when an activity ceases to be passive or if a closely held C corporation or personal service corporation changes status?

If an activity ceases to be passive (e.g., because the taxpayer begins to participate materially), its unused losses (or credits) from prior years continue to be passive, but may be used against the income (and tax liability) of that activity. If there is a change in the status of a closely held C corporation or personal service corporation, its suspended losses from prior years will continue to be treated as if the status of the corporation had not changed.1

Planning Point: As a general rule, an individual will be treated as materially participating in an activity for the taxable year if, and only if, he or she participates in the activity for more than 500 hours during the year, or if his or her participation satisfies one of six other requirements in Temporary Treasury Regulation Section 1.469-5T(a). For instance, the individual’s participation will be deemed material if, based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during such year.2

For an explanation of losses allowed upon disposition of an interest in a former passive activity, see Q 8019.

1.  IRC § 469(f).

2.  Temp. Treas. Reg. § 1.469-5T(a)(7).

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