by Roger McEowen, Leonard Dolezal Professor in Agricultural Law, (515) 294-4076, mceowen@iastate.eduby Roger McEowen, Leonard Dolezal Professor in Agricultural Law, (515) 294-4076, mceowen@iastate.edu
The passive loss rules apply to activities that involve the conduct of a trade or business and the taxpayer does not materially participate in the activity or in rental activity on a basis which is regular, continuous and substantial. If the passive loss rules apply, deductions (losses) from passive trade or business activities, to the extent the deductions exceed income from all passive activities, may not be deducted against other income (non-passive activity gains). For farmers, the passive loss rules are likely to come into play in situations where the farmer is a passive investor in a separate business venture apart from the farming operation. In that case, the losses from the venture cannot be used to offset the income from the farming operation - unless the farmer can group the activities together as a single economic unit for passive loss purposes. If grouping can be done, the farmer's material participation in the farming activity will count as material participation in the passive business, and the losses will offset the farming income.
Any reasonable method for making the grouping determination can be utilized, but certain factors are given the greatest weight in determining whether activities should be grouped or kept separate - (1) similarities or differences in types of businesses; (2) extent of common control; (3) extent of common ownership; (4) geographic location; and (5) business interdependencies.
The election to group activities is made by filing a statement with the taxpayer's original income tax return for the taxable year. The following are sample election statements. One is for a grain storage activity and the other is for a hog breeding facility.
Grouping of activities (grain storage) (pdf)