Section 469 of the Internal Revenue Code is a minefield for taxpayers with business or investment endeavors. The “passive activity” rules can turn seemingly deductible business losses into non-deductible losses. And, the rules for determining whether an activity is passive or not can be cumbersome.

Joe Kristan at the Tax Update Blog tells the story of a Minnesota man who owned a ranch in Colorado in addition to a successful manufacturing business. The IRS and Tax Court both disallowed losses sustained in the ranch because it was a passive activity. As Joe explains:

The regulations say you achieve “material participation” in non-real estate activities for a tax year if:

-You participate at least 500 hours; or
-You participate at least 100 hours and at least 500 hours in that and other “100 hour” activities; or
-You participate at least 100 hours and more than anybody else, or
-You are the only participant; or
-You materially participated in five of the past ten years )or in any three years for a service activity).

There is also a “facts and circumstances” test, but don’t count on it.

You can find Joe’s story here.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”