Form 8810: Corporate Passive Activity Loss and Credit

Form 8810, Corporate Passive Activity Loss and Credit Limitations, is a tax form used by certain corporations to calculate limits on their passive activity losses and credits. The Internal Revenue Service (IRS) uses this form to enforce rules under Internal Revenue Code Section 469. These rules prevent corporations from using passive activity losses to offset income from other sources, like active business operations.

Determining if You Must File Form 8810

Filing Form 8810 is required for specific corporate structures that have a net loss or a credit from a passive activity. The two types of entities subject to these rules are closely held corporations (CHCs) and personal service corporations (PSCs). A corporation in either of these categories with passive activity must file this form.

A corporation is a closely held corporation if it meets a stock ownership test. This test is met if, at any time during the last half of the tax year, more than 50% of its outstanding stock value is owned by five or fewer individuals.

A personal service corporation must meet a principal activity and an employee-ownership test. The principal activity must be performing personal services in fields such as:

• Health
• Law
• Engineering
• Architecture
• Accounting
• Actuarial science
• Performing arts
• Consulting

For the ownership test, over 95% of the corporation’s stock must be held by current or retired employees, their estates, or heirs.

Key Concepts for Form 8810

For a corporation, a passive activity is any trade or business in which it did not materially participate for the tax year. This includes most rental activities, which are considered passive regardless of the corporation’s level of involvement.

The standard for “material participation” is different for a corporation than for an individual. A corporation materially participates if shareholders who own more than 50% of its stock are involved in the activity’s operations on a regular, continuous, and substantial basis.

A closely held corporation, but not a personal service corporation, can also meet the material participation standard through the work of its employees. This alternative test requires having a sufficient number of qualified employees involved in the activity’s management and operations.

Information Required to Complete Form 8810

To complete Form 8810, a corporation must gather specific financial data for each of its passive activities. You will need the following for the current tax year:

• Gross income
• Gains
• Deductions
• Losses

The corporation must also have figures for any credits derived from its passive activities, such as those for research or low-income housing.

Another element is the amount of any prior-year unallowed passive activity losses and credits. Disallowed losses and credits are not permanently lost but are carried forward to the current tax year. These carryover amounts are added to the current year’s figures to determine the total passive loss and credit available.

Calculating the Limitations on Form 8810

The form is divided into parts that guide the taxpayer through the limitation process, often requiring worksheets from the form’s instructions to compute the final amounts.

Part I focuses on the Passive Activity Loss Limitation. The corporation combines income and losses from all passive activities, including prior-year carryover losses, to find a net figure. A special rule allows closely held corporations to offset passive losses against their “net active income.” Personal service corporations can only offset passive losses against passive income.

Part II addresses the Passive Activity Credit Limitation. This section calculates the allowed credit from passive activities for the tax year. The allowable credit is limited to the tax liability attributable to the corporation’s net passive income. If the corporation has no net passive income, it cannot claim any passive activity credits for the year.

Filing and Recordkeeping

Form 8810 must be attached to the corporation’s primary income tax return, such as Form 1120, U.S. Corporation Income Tax Return. The results from Form 8810 are carried to the appropriate lines of the main tax return to report the allowed losses and credits.

Any unallowed losses and credits calculated on Form 8810 are carried forward to the next tax year. The corporation must keep detailed worksheets and supporting documents that substantiate the figures reported. These records are needed to accurately complete Form 8810 in subsequent years.