Question

This week we are focusing on tax implications for three types of business entities: corporations, S corporations, partnerships, and LLCs. In your initial post address the following: List and explain the pros and cons, from a taxation sense, of operating each type of business. Explain the importance of the passive activity loss rules. Why do you think these rules were put into law?

Answer 1

Importance of passive activity loss rules.

* the proper determination of trade or business activity status as passive versus non- passive has become increasingly critical,as such characterization also influences whether the activitys income is subject to new 3.8% Net investment income tax.the rules with respect to rental rent estate can be especially complex since the rental activity must also independently satisfy the trade or business requirement,for purposes of the NII tax.thus anyone engaged in real estate activities especially where there are activity disposition or addition,should carefully asses new frouping and grouping addition,as well as documentation of material participation and the delineation between time spent as real estate agent versus time spent in the context of real estate activities.

Assumption:to know about the importance of passive activity loss rules we take the example of real estate business example.

Why passive activity rule put in law.

* Passive activity losses can only be applied in current year and if they exceed passive income they can be carried forward without limitation they cant be carried back.

* passive activity rule are set of IRS rules that prohibit using passive losses to offset earned or ordinary income .passive activity loss rules prevent investors from using losses incurred from income producing activities in which they are not materially involved.

being materially involve with earned or ordinary income producing activities means the income is active income and may not be reduced by passive losses.can be used to offset passive income.