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:: Passive Activity Loss ATG - Exhibit 2.6: Equipment Rentals IRC § 469(c)(2) and Reg. § 1.469-1T(e)(3)
Exhibit
2.6: Equipment Rentals IRC §
469(c)(2) and Reg. §
1.469-1T(e)(3)
ISSUE:
Schedule C/E for
_________________________
Are losses
limited because activity is
passive? Generally, long-term
equipment rentals are passive,
and losses (from Schedule C, E,
F1065s or S Corporations) are
not deductible unless taxpayer
has passive income from another
activity. An equipment lease of
greater than seven days is
generally passive. Whether or
not the taxpayer materially
participates is irrelevant. The
IRC § 469(c)(2)&(4). Passive
equipment rentals go on FORM
8582 and cannot be deducted in
the absence of passive income.
With short-term rentals, the
activity is treated like a
business and taxpayer must
materially participate to deduct
losses. See Reg. §
1.469-1T(e)(3)(ii) for
exceptions to the rental
definition.
_____
Determine the average period of
customer use. Days rented
divided by number of customers
for the year. Customer use =
Each period during which a
customer has a continuous or
recurring right to use the
property (whether or not he
actually uses it). Does the
taxpayer have preferential
rights to use the property? If
so, the period of customer use
is generally the entire year.
If the average period of
customer use is more than 7
days, activity is generally a
rental activity (IRC §
469(c)(2)&(4) and Reg. §
l.469-lT(e)(3)(i)), and losses
are allowable only up to passive
income from other activities.
If customer use is less than 7
days, the activity is still
passive unless the taxpayer
materially participates (IRC §
469(h) and Reg. § 1.469-5T(a)).
_____ Secure
lease and any other agreements.
What is lease period? Does
taxpayer have a recurring right
to use the equipment? Does lease
stipulate payments are for use
of the equipment? OR are
payments primarily for
taxpayer’s services in driving
and/or maintaining the
equipment? A rental is defined
as the lease of tangible
property where amounts paid are
principally for use of the
property (Reg. §
1.469-1T(e)(3)(b)) - as opposed
to a service intensive activity
where rental of property is
incidental to services
received. Service intensive
activities are generally treated
as businesses.
_____ Secure
insurance contracts. Is
equipment insured personally?
Is it insured for use by
customers?
_____ Is the
equipment leased to an S
corporation in which the
taxpayer is the 100 percent
shareholder? If so, the
taxpayer may be able to deduct
his losses under IRC § 469.
While rentals generally may
not be grouped as a single
activity under Reg. §
1.469-4(d), there is an
exception, which permits a
rental activity and the business
leasing the property to group IF
they are owned in identical
percent and they form an
integrated, interrelated
economic unit. A rental
activity, however, can never be
grouped with a C Corporation.
CONCLUSION:
Under IRC § 469, equipment
losses are/are not allowed.
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