Department of the Treasury

Internal Revenue Service

Publication 925

Cat. No. 64265X

Passive 

Activity

and

At-Risk Rules

For use in preparing

2023 Returns

Get forms and other information faster and easier at:

• IRS.gov (English) 

• IRS.gov/Spanish (Español) 

• IRS.gov/Chinese (中文) 

• IRS.gov/Korean (한국어) 

• IRS.gov/Russian (Pусский) 

• IRS.gov/Vietnamese (Tiếng Việt) 

Contents

Future Developments ....................... 1

Introduction .............................. 2

Passive Activity Limits ...................... 3

Who Must Use These Rules? ............... 3

Passive Activities ........................ 4

Activities That Aren’t Passive Activities ......... 7

Passive Activity Income and Deductions ........ 9

Grouping Your Activities .................. 12

Recharacterization of Passive Income ........ 15

Dispositions ........................... 17

How To Report Your Passive Activity Loss ...... 18

At-Risk Limits ............................ 19

Who Is Affected? ....................... 19

Activities Covered by the At-Risk Rules ....... 20

At-Risk Amounts ........................ 21

Amounts Not at Risk ..................... 22

Reductions of Amounts at Risk ............. 23

Recapture Rule ........................ 23

How To Get Tax Help ....................... 23

Index .................................. 27

Future Developments

For the latest developments related to Pub. 925, such 

as legislation enacted after it was published, go to 

IRS.gov/Pub925.

Reminders

Excess business loss limitation. If you are a noncorporate taxpayer and have allowable business losses after 

taking into account first the at-risk limitations and then the 

passive loss limitations (Form 8582), your losses may be 

subject to the excess business loss limitation. After taking 

into account all the other loss limitations, complete Form 

461, Limitation on Business Losses, to figure the amount 

of your excess business loss. See Form 461 and its instructions for details on the excess business loss limitation.

Commercial revitalization deduction (CRD). The 

120-month deduction period for rental real estate placed 

in service by December 31, 2009, has expired. See Form 

8582 and its instructions for reporting requirements for unused CRDs.

Changes in rules on grouping and definition of real 

property trade or business. T.D. 9943 revised certain 

rules in the Regulations under section 469.

• Applicable date. The new rules apply to tax years beginning on or after March 22, 2021, but you may 

Mar 1, 2024
chose to adopt these rules earlier. See Regulations 

section 1.469-11(a)(1) and (4) for additional information on applicability dates and early adoption. If you 

are a calendar year taxpayer, the new provision applies to you beginning in calendar year 2022.

• Grouping rules. T.D. 9943 added Regulations section 1.469-4(d)(6), which prohibits grouping of trading 

activities described in Temporary Regulations section 

1.469-1T(e)(6) subject to section 163(d)(5)(A)(ii) involving a non-passive trade or business in which the 

taxpayer does not materially participate with any other 

activity or activities including other trading activities. 

See Regulations section 1.469-4(d)(6) for more details.

• Definition of real property trade or business. T.D. 

9905 and 9943 expanded Regulations section 

1.469-9(b)(2)(i) to define several terms used in determining whether a trade or business is a real property 

trade or business for purposes of section 469(c)(7)

(C). T.D. 9905 added Regulations sections 1.469-9(b)

(2)(ii)(H) and (I) defining real property operations and 

real property management. T.D. 9943 added Regulations sections 1.469-9(b)(2)(ii)(A) and (B) defining real 

property development and real property redevelopment.

Regrouping due to Net Investment Income Tax. You 

may be able to regroup your activities if you’re subject to 

the Net Investment Income Tax. See Regrouping Due to 

Net Investment Income Tax under Grouping Your Activities, later, for more information.

At-risk amounts. The following rules apply to amounts 

borrowed after May 3, 2004.

• You must file Form 6198, At-Risk Limitations, if you’re 

engaged in an activity included in (6) under Activities 

Covered by the At-Risk Rules and you have borrowed 

certain amounts described in Certain borrowed 

amounts excluded under At-Risk Amounts in this publication.

• You may be considered at risk for certain amounts described in Certain borrowed amounts excluded under 

At-Risk Amounts secured by real property used in the 

activity of holding real property (other than mineral 

property) that, if nonrecourse, would be qualified nonrecourse financing.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for 

Missing & Exploited Children® (NCMEC). Photographs of 

missing children selected by the Center may appear in 

this publication on pages that would otherwise be blank. 

You can help bring these children home by looking at the 

photographs and calling 800-THE-LOST (800-843-5678) 

if you recognize a child.

Introduction

This publication discusses two sets of rules that may limit 

the amount of your deductible loss from a trade, business, 

rental, or other income-producing activity. The first part of 

the publication discusses the passive activity rules. The 

second part discusses the at-risk rules. However, when 

you figure your allowable losses from any activity, you 

must apply the at-risk rules before the passive activity 

rules.

Comments and suggestions. We welcome your comments about this publication and suggestions for future 

editions.

You can send us comments through IRS.gov/

FormComments. Or, you can write to the Internal Revenue 

Service, Tax Forms and Publications, 1111 Constitution 

Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will 

consider your comments and suggestions as we revise 

our tax forms, instructions, and publications. Don’t send 

tax questions, tax returns, or payments to the above address.

Getting answers to your tax questions. If you have 

a tax question not answered by this publication or the How 

To Get Tax Help section at the end of this publication, go 

to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the search 

feature or viewing the categories listed.

Getting tax forms, instructions, and publications. 

Go to IRS.gov/Forms to download current and prior-year 

forms, instructions, and publications.

Ordering tax forms, instructions, and publications. 

Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order 

prior-year forms and instructions. The IRS will process 

your order for forms and publications as soon as possible. 

Don’t resubmit requests you’ve already sent us. You can 

get forms and publications faster online.

Useful Items

You may want to see:

Publication

27 Residential Rental Property (Including Rental of 

Vacation Homes)

41 Partnerships

Form (and Instructions)

492 Investment Interest Expense Deduction

6198 At-Risk Limitations

882 Passive Activity Loss Limitations

882-CR Passive Activity Credit Limitations

8810 Corporate Passive Activity Loss and Credit 

Limitations

8949 Sales and Other Dispositions of Capital Assets

See How To Get Tax Help at the end of this publication for 

information about getting these publications and forms.

 527

 541

 4952

 6198

 8582

 8582-CR

 8810

 8949

2 Publication 925 (2023)
Passive Activity Limits

Who Must Use These Rules?

The passive activity rules apply to:

• Individuals,

• Estates,

• Trusts (other than grantor trusts),

• Personal service corporations, and

• Closely held corporations.

Even though the rules don’t apply to grantor trusts, partnerships, and S corporations directly, they do apply to the 

owners of these entities.

For information about personal service corporations 

and closely held corporations, including definitions and 

how the passive activity rules apply to these corporations, 

see Form 8810 and its instructions.

Before applying the passive activity limits, you 

must first determine the amount of the deductions 

disallowed under the basis or at-risk rules. See 

Passive Activity Deductions, later.

Passive Activity Loss

Generally, the passive activity loss for the tax year isn’t allowed. However, there is a special allowance under which 

some or all of your passive activity loss may be allowed. 

See Special $25,000 allowance, later.

Definition of passive activity loss. Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. See Passive Activity Income and Deductions, later.

For a closely held corporation, the passive activity loss 

is the excess of passive activity deductions over the sum 

of passive activity gross income and net active income. 

For details on net active income, see the Instructions for 

Form 8810. For the definition of passive activity gross income, see Passive Activity Income, later. For the definition 

of passive activity deductions, see Passive Activity Deductions, later.

Identification of Disallowed Passive Activity 

Deductions

If all or a part of your passive activity loss is disallowed for 

the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and 

among different deductions within a passive activity.

Allocation of disallowed passive activity loss among 

activities. If all or any part of your passive activity loss is 

disallowed for the tax year, a ratable portion of the loss (if 

any) from each of your passive activities is disallowed. 

The ratable portion of a loss from an activity is computed 

CAUTION

!

by multiplying the passive activity loss that’s disallowed for 

the tax year by the fraction obtained by dividing:

1. The loss from the activity for the tax year; by

2. The sum of the losses for the tax year from all activities having losses for the tax year.

Use Part VII of Form 8582 to figure the ratable portion of 

the loss from each activity that’s disallowed.

Loss from an activity. The term “loss from an activity” 

means:

1. The amount by which the passive activity deductions 

(defined later) from the activity for the tax year exceed 

the passive activity gross income (defined later) from 

the activity for the tax year; reduced by

2. Any part of such amount that’s allowed under the Special $25,000 allowance, later.

If your passive activity gross income from significant 

participation passive activities (defined later) for the tax 

year is more than your passive activity deductions from 

those activities for the tax year, those activities shall be 

treated, solely for purposes of figuring your loss from the 

activity, as a single activity that doesn’t have a loss for 

such tax year. See Significant Participation Passive Activities, later.

Example. Terry holds interests in three passive activities, A, B, and C. The gross income and deductions from 

these activities for the tax year are as follows.

A B C Total

Gross income $7,000 $4,000 $12,000 $23,000

Deductions (16,000) (20,000) (8,000) (44,000)

Net income 

(loss) ($9,000) ($16,000) $4,000 ($21,000)

Terry’s $21,000 passive activity loss for the tax year is 

disallowed. Therefore, a ratable portion of the losses from 

activities A and B is disallowed. The disallowed portion of 

each loss is as follows.

A: $21,000 x $9,000/$25,000 $7,560

B: $21,000 x $16,000/$25,000 13,440

Total $21,000

Allocation within loss activities. If all or any part of 

your loss from an activity is disallowed under Allocation of 

disallowed passive activity loss among activities for the 

tax year, a ratable portion of each of your passive activity 

deductions (defined later), other than an excluded deduction (defined next) from such activity is disallowed. The 

ratable portion of a passive activity deduction is the 

amount of the disallowed portion of the loss from the 

Publication 925 (2023) 3
activity for the tax year multiplied by the fraction obtained 

by dividing:

1. The amount of such deduction; by

2. The sum of all of your passive activity deductions 

(other than excluded deductions) from that activity 

from the tax year.

Excluded deductions. “Excluded deduction” means 

any passive activity deduction that’s taken into account in 

computing your net income from an item of property for a 

tax year in which an amount of the taxpayer's gross income from such item of property is treated as not from a 

passive activity. See Recharacterization of Passive Income, later.

Separately identified deductions. In identifying the 

deductions from an activity that are disallowed, you don’t 

need to account separately for a deduction unless such 

deduction may, if separately taken into account, result in 

an income tax liability for any tax year different from that 

which would result were such deduction not taken into account separately.

Use Form 8582, Part IX, for any activity if you have passive activity deductions for that activity that must be separately identified.

Deductions that must be accounted for separately include (but aren’t limited to) the following deductions.

• Deductions that arise in a rental real estate activity in 

tax years in which you actively participate in such activity. See Active participation, later.

• Deductions that arise in a rental real estate activity in 

tax years in which you don’t actively participate in 

such activity. See Active participation, later.

• Losses from sales or exchanges of capital assets.

• Section 1231 losses. See Section 1231 Gains and 

Losses in Pub. 544, Sales and Other Dispositions of 

Assets, for more information.

Carryover of Disallowed Deductions

In the case of an activity with respect to which any deductions or credits are disallowed for a tax year (the loss activity), the disallowed deductions are allocated among 

your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. The disallowed deductions or credits 

allocated to an activity under the preceding sentence are 

treated as deductions or credits from the activity for the 

next tax year. For more information, see Regulations section 1.469-1(f)(4).

Passive Activity Credit

Generally, the passive activity credit for the tax year is disallowed.

The passive activity credit is the amount by which the 

sum of all your credits subject to the passive activity rules 

exceed your regular tax liability allocable to all passive activities for the tax year. Credits that are included in figuring 

the general business credit are subject to the passive activity rules.

See the Instructions for Form 8582-CR for more information.

Publicly Traded Partnership

You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). You must also apply the 

limit on passive activity credits separately to your credits 

from a passive activity held through a PTP.

You can offset deductions from passive activities of a 

PTP only against income or gain from passive activities of 

the same PTP. Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. This separate treatment 

rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest.

For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on 

passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the instructions for Forms 8582 and 

8582-CR, respectively.

Passive Activities

There are two kinds of passive activities.

• Trade or business activities in which you don’t materially participate during the year.

• Rental activities, even if you do materially participate 

in them, unless you’re a real estate professional.

Material participation in a trade or business is discussed, 

later, under Activities That Aren’t Passive Activities.

Treatment of former passive activities. A former passive activity is an activity that was a passive activity in any 

earlier tax year, but isn’t a passive activity in the current 

tax year. You can deduct a prior-year unallowed loss from 

the activity up to the amount of your current-year net income from the activity. Treat any remaining prior-year unallowed loss like you treat any other passive loss.

In addition, any prior-year unallowed passive activity 

credits from a former passive activity offset the allocable 

part of your current-year tax liability. The allocable part of 

your current-year tax liability is that part of this year's tax 

liability that‘s allocable to the current-year net income from 

the former passive activity. You figure this after you reduce 

your net income from the activity by any prior-year unallowed loss from that activity (but not below zero).

Trade or Business Activities

A trade or business activity is an activity that:

• Involves the conduct of a trade or business (that is, 

deductions would be allowable under section 162 of 

the Internal Revenue Code if other limitations, such as 

the passive activity rules, didn’t apply);

4 Publication 925 (2023)
• Is conducted in anticipation of starting a trade or business; or

• Involves research or experimental expenditures that 

are deductible under Internal Revenue Code section 

174 (or that would be deductible if you chose to deduct rather than capitalize them).

A trade or business activity doesn’t include a rental activity 

or the rental of property that’s incidental to an activity of 

holding the property for investment.

You generally report trade or business activities on 

Schedule C, F, or in Part II or III of Schedule E.

Rental Activities

A rental activity is a passive activity even if you materially 

participated in that activity, unless you materially participated as a real estate professional. See Real Estate Professional under Activities That Aren’t Passive Activities, later. 

An activity is a rental activity if tangible property (real or 

personal) is used by customers or held for use by customers, and the gross income (or expected gross income) 

from the activity represents amounts paid (or to be paid) 

mainly for the use of the property. It doesn’t matter 

whether the use is under a lease, a service contract, or 

some other arrangement.

Exceptions. Your activity isn’t a rental activity if any of the 

following apply.

1. The average period of customer use of the property is 

7 days or less. You figure the average period of customer use by dividing the total number of days in all 

rental periods by the number of rentals during the tax 

year. If the activity involves renting more than one 

class of property, multiply the average period of customer use of each class by a fraction. The numerator 

of the fraction is the gross rental income from that 

class of property and the denominator is the activity's 

total gross rental income. The activity's average period of customer use will equal the sum of the 

amounts for each class.

2. The average period of customer use of the property, 

as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. 

Significant personal services include only services 

performed by individuals. To determine if personal 

services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor 

required to perform the services, and the value of the 

services relative to the amount charged for use of the 

property. Significant personal services don’t include 

the following.

a. Services needed to permit the lawful use of the 

property;

b. Services to repair or improve property that would 

extend its useful life for a period substantially longer than the average rental; and

c. Services that are similar to those commonly provided with long-term rentals of real estate, such as 

cleaning and maintenance of common areas or 

routine repairs.

3. You provide extraordinary personal services in making 

the rental property available for customer use. Services are extraordinary personal services if they’re performed by individuals and the customers' use of the 

property is incidental to their receipt of the services.

4. The rental is incidental to a nonrental activity. The 

rental of property is incidental to an activity of holding 

property for investment if the main purpose of holding 

the property is to realize a gain from its appreciation 

and the gross rental income from the property is less 

than 2% of the smaller of the property's unadjusted 

basis or fair market value. The unadjusted basis of 

property is its cost not reduced by depreciation or any 

other basis adjustment. The rental of property is incidental to a trade or business activity if all of the following apply.

a. You own an interest in the trade or business activity during the year.

b. The rental property was used mainly in that trade 

or business activity during the current year, or during at least 2 of the 5 preceding tax years.

c. Your gross rental income from the property is less 

than 2% of the smaller of its unadjusted basis or 

fair market value. Lodging provided to an employee or the employee's spouse or dependents is 

incidental to the activity or activities in which the 

employee performs services if the lodging is furnished for the employer's convenience.

5. You customarily make the rental property available 

during defined business hours for nonexclusive use 

by various customers.

6. You provide the property for use in a nonrental activity 

in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting 

that activity.

If you meet any of the exceptions listed above, 

see the Instructions for Form 8582 for information 

about how to report any income or loss from the 

activity.

Special $25,000 allowance. If you or your spouse actively participated in a passive rental real estate activity, 

the amount of the passive activity loss that’s disallowed is 

decreased and you therefore can deduct up to $25,000 of 

loss from the activity from your nonpassive income. This 

special allowance is an exception to the general rule disallowing the passive activity loss. Similarly, you can offset 

credits from the activity against the tax on up to $25,000 of 

nonpassive income after taking into account any losses allowed under this exception.

If you’re married, filing a separate return, and lived 

apart from your spouse for the entire tax year, your special 

allowance can’t be more than $12,500. If you lived with 

TIP

Publication 925 (2023) 5
your spouse at any time during the year and are filing a 

separate return, you can’t use the special allowance to reduce your nonpassive income or tax on nonpassive income.

The maximum special allowance is reduced if your 

modified adjusted gross income exceeds certain amounts. 

See Phaseout rule, later.

Example. You are a single taxpayer. You have $70,000 

in wages, $15,000 income from a limited partnership, a 

$26,000 loss from rental real estate activities in which you 

actively participated. Because your modified adjusted 

gross income is less than $100,000, you aren’t subject to 

the modified adjusted gross income phaseout rule. You 

can use $15,000 of your $26,000 loss to offset your 

$15,000 passive income from the partnership. You actively 

participated in your rental real estate activities, so you can 

use the remaining $11,000 rental real estate loss to offset 

$11,000 of your nonpassive income (wages).

Active participation. Active participation isn’t the 

same as material participation (defined later). Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant 

and bona fide sense. Management decisions that count 

as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.

Only individuals can actively participate in rental real 

estate activities. However, a decedent's estate is treated 

as actively participating for its tax years ending less than 2 

years after the decedent's death, if the decedent would 

have satisfied the active participation requirement for the 

activity for the tax year the decedent died.

A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as 

part of the estate. The choice applies to tax years ending 

after the decedent's death and before:

• 2 years after the decedent's death if no estate tax return is required, or

• 6 months after the estate tax liability is finally determined if an estate tax return is required.

The choice is irrevocable and can’t be made later than 

the due date for the estate's first income tax return (including any extensions).

Except as provided in regulations, limited partners 

aren’t treated as actively participating in a partnership's 

rental real estate activities.

You aren’t treated as actively participating in a rental 

real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by 

value) of all interests in the activity throughout the year.

Active participation isn’t required to take the low-income housing credit or the rehabilitation investment credit 

from rental real estate activities.

Example. Stacey, a single taxpayer, had the following 

income and loss during the tax year.

Salary .............................. $42,300

Dividends ............................ 300

Interest .............................. 1,400

Rental loss ........................... (4,000) 

The rental loss came from a house Stacey owned. Stacey advertised and rented the house to the current tenant. 

Stacey also collected the rents and did the repairs or hired 

someone to do them.

Even though the rental loss is a loss from a passive activity, Stacey can use the entire $4,000 loss to offset other 

income because Stacey actively participated.

Phaseout rule. The maximum special allowance of 

$25,000 ($12,500 for married individuals filing separate 

returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted 

gross income that’s more than $100,000 ($50,000 if you’re 

married filing separately). If your modified adjusted gross 

income is $150,000 or more ($75,000 or more if you’re 

married filing separately), you generally can’t use the special allowance. This is because the special allowance is 

reduced to $0 since the modified adjusted gross income is 

over the $100,000 amount.

Modified adjusted gross income for this purpose is your 

adjusted gross income figured without the following.

• Taxable social security and Tier 1 railroad retirement 

benefits.

• Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans.

• The exclusion from income of interest from qualified 

U.S. savings bonds used to pay qualified higher education expenses.

• The exclusion from income of amounts received from 

an employer's adoption assistance program.

• Passive activity income or loss included on Form 

8582.

• Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate 

Professional (as discussed, later, under Activities That 

Aren’t Passive Activities).

• Any overall loss from a publicly traded partnership 

(see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582).

• The deduction allowed for the deductible part of 

self-employment tax.

• Foreign-derived intangible income and global intangible low-taxed income.

• The deduction allowed for interest on student loans.

Example. During 2023, you were unmarried and 

weren’t a real estate professional. For 2023, you had 

$120,000 in salary and a $31,000 loss from your rental 

real estate activities in which you actively participated. 

Your modified adjusted gross income is $120,000. When 

you file your 2023 return, you can deduct only $15,000 of 

6 Publication 925 (2023)
your passive activity loss. You must carry over the remaining $16,000 passive activity loss to 2024. You figure your 

deduction and carryover as follows.

Adjusted gross income, modified as

required ............................. $120,000 

Minus amount not subject to phaseout .......... –100,000

Amount subject to phaseout rule .............. $20,000 

Multiply by 50% (0.50) ..................... × 50% 

Required reduction to special allowance .......... $10,000 

Maximum special allowance ................. $25,000 

Minus required reduction (see above) ........... –10,000 

Adjusted special allowance .................. $15,000 

Passive loss from rental real estate ............. $31,000 

Deduction allowable/Adjusted 

special allowance (see above) ................ –15,000 

Amount that must be carried forward ............ $16,000 

Exceptions to the phaseout rules. A higher phaseout range applies to rehabilitation investment credits from 

rental real estate activities. For those credits, the phaseout 

of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 

if you’re a married individual filing a separate return and 

living apart at all times during the year).

There is no phaseout of the $25,000 special allowance 

for low-income housing credits.

Ordering rules. If you have more than one of the exceptions to the phaseout rules in the same tax year, you 

must apply the $25,000 phaseout against your passive activity losses and credits in the following order.

1. Passive activity losses.

2. The portion of passive activity credits attributable to 

credits other than the rehabilitation and low-income 

housing credits.

3. The portion of passive activity credits attributable to 

the rehabilitation credit.

4. The portion of passive activity credits attributable to 

the low-income housing credit.

Activities That Aren’t Passive 

Activities

The following aren’t passive activities.

1. Trade or business activities in which you materially 

participated for the tax year.

2. A working interest in an oil or gas well that you hold directly or through an entity that doesn’t limit your liability (such as a general partner interest in a 

partnership). It doesn’t matter whether you materially 

participated in the activity for the tax year. However, if 

your liability was limited for part of the year (for example, you converted your general partner interest to a 

limited partner interest during the year) and you had a 

net loss from the well for the year, some of your income and deductions from the working interest may 

be treated as passive activity gross income and passive activity deductions. See Temporary Regulations 

section 1.469-1T(e)(4)(ii).

3. The rental of a dwelling unit that you also used for personal purposes during the year for more than the 

greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.

4. An activity of trading personal property for the account 

of those who own interests in the activity. See Temporary Regulations section 1.469-1T(e)(6).

5. Rental real estate activities in which you materially 

participated as a real estate professional. See Real 

Estate Professional, later.

You shouldn’t enter income and losses from these 

activities on Form 8582, as they are not passive 

activities. Instead, enter them on the forms or 

schedules you would normally use.

Material Participation

A trade or business activity isn’t a passive activity if you 

materially participated in the activity.

Material participation tests. You materially participated 

in a trade or business activity for a tax year if you satisfy 

any of the following tests.

1. You participated in the activity for more than 500 

hours.

2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own 

any interest in the activity.

3. You participated in the activity for more than 100 

hours during the tax year, and you participated at 

least as much as any other individual (including individuals who didn’t own any interest in the activity) for 

the year.

4. The activity is a significant participation activity, and 

you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which 

you participated for more than 100 hours during the 

year and in which you didn’t materially participate under any of the material participation tests, other than 

this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, 

later.

5. You materially participated in the activity (other than 

by meeting this fifth test) for any 5 (whether or not 

CAUTION

!

Publication 925 (2023) 7
consecutive) of the 10 immediately preceding tax 

years.

6. The activity is a personal service activity in which you 

materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of 

personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital 

isn’t a material income-producing factor.

7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

You didn’t materially participate in the activity under test 

(7) if you participated in the activity for 100 hours or less 

during the year. Your participation in managing the activity 

doesn’t count in determining whether you materially participated under this test if:

• Any person other than you received compensation for 

managing the activity, or

• Any individual spent more hours during the tax year 

managing the activity than you did (regardless of 

whether the individual was compensated for the management services).

Participation. In general, any work you do in connection 

with an activity in which you own an interest is treated as 

participation in the activity.

Work not usually performed by owners. You don’t 

treat the work you do in connection with an activity as participation in the activity if both of the following are true.

• The work isn’t work that’s customarily done by the 

owner of that type of activity.

• One of your main reasons for doing the work is to 

avoid the disallowance of any loss or credit from the 

activity under the passive activity rules.

Participation as an investor. You don’t treat the work 

you do in your capacity as an investor in an activity as participation unless you’re directly involved in the day-to-day 

management or operations of the activity. Work you do as 

an investor includes:

• Studying and reviewing financial statements or reports 

on operations of the activity,

• Preparing or compiling summaries or analyses of the 

finances or operations of the activity for your own use, 

and

• Monitoring the finances or operations of the activity in 

a nonmanagerial capacity.

Spouse's participation. Your participation in an activity 

includes your spouse's participation. This applies even if 

your spouse didn’t own any interest in the activity and you 

and your spouse don’t file a joint return for the year.

Proof of participation. You can use any reasonable method to prove your participation in an activity for the year. You don’t have to keep contemporaneous daily time reports, logs, or similar documents if 

you can establish your participation in some other way. For 

example, you can show the services you performed and 

the approximate number of hours spent by using an appointment book, calendar, or narrative summary.

Limited partners. If you owned an activity as a limited 

partner, you generally aren’t treated as materially participating in the activity. However, you’re treated as materially 

participating in the activity if you met test (1), (5), or (6) under Material participation tests, discussed earlier, for the 

tax year.

You aren’t treated as a limited partner, however, if you 

were also a general partner in the partnership at all times 

during the partnership's tax year ending with or within your 

tax year (or, if shorter, during that part of the partnership's 

tax year in which you directly or indirectly owned your limited partner interest).

Retired or disabled farmer and surviving spouse of a 

farmer. If you’re a retired or disabled farmer, you’re treated as materially participating in a farming activity if you 

materially participated for 5 or more of the 8 years before 

your retirement or disability. Similarly, if you’re a surviving 

spouse of a farmer, you’re treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of 

farm property passed from a qualifying decedent, and you 

actively manage the farm.

Corporations. A closely held corporation or a personal 

service corporation is treated as materially participating in 

an activity only if one or more shareholders holding more 

than 50% by value of the outstanding stock of the corporation materially participate in the activity.

A closely held corporation can also satisfy the material 

participation standard by meeting the first two requirements for the qualifying business exception from the 

at-risk limits. See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later.

Real Estate Professional

Generally, rental activities are passive activities even if you 

materially participated in them. However, if you qualified 

as a real estate professional, rental real estate activities in 

which you materially participated aren’t passive activities. 

For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to 

treat all interests in rental real estate activities as one activity. See the Instructions for Schedule E (Form 1040), 

Supplemental Income and Loss, for information about 

making this choice.

If you qualified as a real estate professional for 2023, 

report income or losses from rental real estate activities in 

which you materially participated as nonpassive income or 

losses, and complete line 43 of Schedule E (Form 1040). 

If you also have an unallowed loss from these activities 

RECORDS

8 Publication 925 (2023)
from an earlier year when you didn’t qualify, see Treatment 

of former passive activities under Passive Activities, earlier.

Qualifications. You qualified as a real estate professional for the year if you met both of the following requirements.

• More than half of the personal services you performed 

in all trades or businesses during the tax year were 

performed in real property trades or businesses in 

which you materially participated.

• You performed more than 750 hours of services during 

the tax year in real property trades or businesses in 

which you materially participated.

Don’t count personal services you performed as an employee in real property trades or businesses unless you 

were a 5% owner of your employer. You were a 5% owner 

if you owned (or are considered to have owned) more than 

5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest.

If you file a joint return, don’t count your spouse's personal services to determine whether you met the preceding requirements. However, you can count your spouse's 

participation in an activity in determining if you materially 

participated.

Real property trades or businesses. A real property 

trade or business is a trade or business that does any of 

the following with real property.

• Develops or redevelops it.

• Constructs or reconstructs it.

• Acquires it.

• Converts it.

• Rents or leases it.

• Operates or manages it.

• Brokers it.

Real property development. Real property development is a trade or business that includes the maintenance 

and improvement of raw land to make it suitable for subdivision, further development, or construction of residential 

or commercial buildings. Also included in real property development is the establishment, cultivation, maintenance, 

or improvement of timberlands.

Real property redevelopment. Real property redevelopment is a trade or business that includes demolition, 

deconstruction, separation, and removal of existing buildings, landscaping, and infrastructure on a parcel of land to 

return the land to a raw condition or otherwise prepare the 

land for new development or construction, or for establishment, cultivation, maintenance, or improvement of timberlands.

Real property operations. Real property operations 

involve handling the day-to-day operations of a trade or 

business relating to the maintenance and occupancy of 

the real property affecting its availability or functionality by 

a direct or indirect owner. The real property must be used, 

or held for use, by customers and payments received 

must be principally for the customer's use of the property 

and not for the provision of other significant or extraordinary personal services.

Real property management. Real property management involves handling the day-to-day operations of a 

trade or business relating to the maintenance and occupancy of the real property affecting its availability or functionality by a professional manager. The real property 

must be used, or held for use, by customers and payments received must be principally for the customer's use 

of the property and not for the provision of other significant 

or extraordinary personal services. A professional manager is a person who is not a direct or indirect owner of the 

real property or properties and who is responsible for, on a 

full-time basis, management and oversight of the real 

property or properties.

Closely held corporations. A closely held corporation can qualify as a real estate professional if more than 

50% of the gross receipts for its tax year came from real 

property trades or businesses in which it materially participated.

Passive Activity Income

and Deductions

In figuring your net income or loss from a passive activity, 

take into account only passive activity income and passive 

activity deductions.

Self-charged interest. Certain self-charged interest income or deductions may be treated as passive activity 

gross income or passive activity deductions if the loan 

proceeds are used in a passive activity.

Generally, self-charged interest income and deductions 

result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. This includes both loans you made to the partnership or S corporation and loans the partnership or S 

corporation made to you.

It also includes loans from one partnership or S corporation to another partnership or S corporation if each 

owner in the borrowing entity has the same proportional 

ownership interest in the lending entity.

Exception. The self-charged interest rules don’t apply 

to your interest in a partnership or S corporation if the entity made an election under Regulations section 

1.469-7(g) to avoid the application of these rules. For 

more details on the self-charged interest rules, see Regulations section 1.469-7.

Passive Activity Income

Passive activity income includes all income from passive 

activities and generally includes gain from disposition of 

an interest in a passive activity or property used in a passive activity.

Publication 925 (2023) 9
Passive activity income doesn’t include the following 

items.

• Income from an activity that isn’t a passive activity. 

These activities are discussed under Activities That 

Aren’t Passive Activities, earlier.

• Portfolio income. This includes interest, dividends, annuities, and royalties not derived in the ordinary 

course of a trade or business. It includes gain or loss 

from the disposition of property that produces these 

types of income or that’s held for investment. The exclusion for portfolio income doesn’t apply to 

self-charged interest treated as passive activity income. For more information on self-charged interest, 

see Self-charged interest, earlier.

• Personal service income. This includes salaries, wages, commissions, self-employment income from 

trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments 

from partnerships to partners for personal services.

• Income from positive section 481 adjustments allocated to activities other than passive activities. (Section 

481 adjustments are adjustments that must be made 

due to changes in your accounting method.)

• Income or gain from investments of working capital.

• Income from an oil or gas property if you treated any 

loss from a working interest in the property for any tax 

year beginning after 1986 as a nonpassive loss, as 

discussed in item (2) under Activities That Aren’t Passive Activities, earlier. This also applies to income 

from other oil and gas property, the basis of which is 

determined wholly or partly by the basis of the property in the preceding sentence.

• Any income from intangible property, such as a patent, 

copyright, or literary, musical, or artistic composition, if 

your personal efforts significantly contributed to the 

creation of the property.

• Any other income that must be treated as nonpassive 

income. See Recharacterization of Passive Income, 

later.

• Overall gain from any interest in a publicly traded partnership. See Publicly Traded Partnerships (PTPs) in 

the instructions for Form 8582.

• State, local, and foreign income tax refunds.

• Income from a covenant not to compete.

• Reimbursement of a casualty or theft loss included in 

gross income to recover all or part of a prior-year loss 

deduction, if the loss deduction wasn’t a passive activity deduction.

• Alaska Permanent Fund dividends.

• Cancellation of debt income, if at the time the debt is 

discharged the debt isn’t allocated to passive activities 

under the interest expense allocation rules. See Temporary Regulations section 1.163-8T for information 

about the rules for allocating interest.

Disposition of property interests. Gain on the disposition of an interest in property is generally passive activity 

income if, at the time of the disposition, the property was 

used in an activity that was a passive activity in the year of 

disposition. The gain generally isn’t passive activity income if, at the time of disposition, the property was used 

in an activity that wasn’t a passive activity in the year of 

disposition. An exception to this general rule may apply if 

you previously used the property in a different activity.

Exception for more than one use in the preceding 

12 months. If you used the property in more than one activity during the 12-month period before its disposition, you 

must allocate the gain between the activities on a basis 

that reasonably reflects the property's use during that period. Any gain allocated to a passive activity is passive activity income.

For this purpose, an allocation of the gain solely to the 

activity in which the property was mainly used during that 

period reasonably reflects the property's use if the fair 

market value of your interest in the property isn’t more 

than the lesser of:

• $10,000, or

• 10% of the total of the fair market value of your interest 

in the property and the fair market value of all other 

property used in that activity immediately before the 

disposition.

Exception for substantially appreciated property. 

The gain is passive activity income if the fair market value 

of the property at disposition was more than 120% of its 

adjusted basis and either of the following conditions applies.

• You used the property in a passive activity for 20% of 

the time you held your interest in the property.

• You used the property in a passive activity for the entire 24-month period before its disposition.

If neither condition applies, the gain isn’t passive activity 

income. However, it’s treated as portfolio income only if 

you held the property for investment for more than half of 

the time you held it in nonpassive activities.

For this purpose, treat property you held through a corporation (other than an S corporation) or other entity 

whose owners receive only portfolio income as property 

held in a nonpassive activity and as property held for investment. Also, treat the date you agree to transfer your 

interest for a fixed or determinable amount as the disposition date.

If you used the property in more than one activity during 

the 12-month period before its disposition, this exception 

applies only to the part of the gain allocated to a passive 

activity under the rules described in the preceding discussion.

Disposition of property converted to inventory. If you 

disposed of property that you had converted to inventory 

from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Under this rule, you disregard the property's use as inventory and treat it as if it 

10 Publication 925 (2023)
were still used in that other activity at the time of disposition. This rule applies only if you meet all of the following 

conditions.

• At the time of disposition, you held your interest in the 

property in a dealing activity (an activity that involves 

holding the property or similar property mainly for sale 

to customers in the ordinary course of a trade or business).

• Your other activities included a nondealing activity (an 

activity that doesn’t involve holding similar property for 

sale to customers in the ordinary course of a trade or 

business) in which you used the property for more 

than 80% of the period you held it.

• You didn’t acquire or hold your interest in the property 

for the main purpose of selling it to customers in the 

ordinary course of a trade or business.

Passive Activity Deductions

Generally, a deduction is a passive activity deduction for a 

tax year if and only if such deduction either:

1. Arises in connection with the conduct of an activity 

that’s a passive activity for the tax year, or

2. Is treated as a deduction from an activity for the tax 

year because it was disallowed by the passive activity 

rules in the preceding year and carried forward to the 

tax year.

For purposes of item (1) above, an item of deduction 

arises in the tax year in which the item would be allowable 

as a deduction under the taxpayer's method of accounting 

if taxable income for all tax years were determined without 

regard to the passive activity rules and without regard to 

the basis and at-risk limits. See Coordination with other 

limitations on deductions that apply before the passive activity rules, later.

Passive activity deductions generally include any loss 

from a disposition of property used in a passive activity at 

the time of the disposition and any loss from a disposition 

of less than your entire interest in a passive activity.

Exceptions. Passive activity deductions don’t include the 

following items.

• Deductions for expenses (other than interest expense) 

that are clearly and directly allocable to portfolio income.

• Qualified home mortgage interest, capitalized interest 

expenses, and other interest expenses (other than 

self-charged interest) properly allocable to passive activities. For more information on self-charged interest, 

see Self-charged interest under Passive Activity Income and Deductions, earlier.

• Losses from dispositions of property that produce 

portfolio income or property held for investment.

• State, local, and foreign income taxes.

• Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income 

limit (expired for 2018 through 2025).

• Charitable contribution deductions.

• Net operating loss deductions.

• Percentage depletion carryovers for oil and gas wells.

• Capital loss carrybacks and carryovers.

• Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. See Coordination with 

other limitations on deductions that apply before the 

passive activity rules, later.

• Deductions and losses that would have been allowed 

for tax years beginning before 1987 but for basis or 

at-risk limits.

• Net negative section 481 adjustments allocated to activities other than passive activities. (Section 481 adjustments are adjustments required due to changes in 

accounting methods.)

• Casualty and theft losses, unless losses similar in 

cause and severity recur regularly in the activity.

• The deduction allowed for the deductible part of 

self-employment tax.

Coordination with other limitations on deductions 

that apply before the passive activity rules. An item of 

deduction from a passive activity that’s disallowed for a 

tax year under the basis or at-risk limitations isn’t a passive activity deduction for the tax year. The following sections provide rules for figuring the extent to which items of 

deduction from a passive activity are disallowed for a tax 

year under the basis or at-risk limitations.

Proration of deductions disallowed under basis 

limitations. If any amount of your distributive share of a 

partnership's loss for the tax year is disallowed under the 

basis limitation, a ratable portion of your distributive share 

of each item of deduction or loss of the partnership is disallowed for the tax year. For this purpose, the ratable portion of an item of deduction or loss is the amount of such 

item multiplied by the fraction obtained by dividing:

1. The amount of your distributive share of partnership 

loss that’s disallowed for the tax year, by

2. The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year.

If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis 

limitation, a ratable portion of your pro rata share of each 

item of deduction or loss of the S corporation is disallowed 

for the tax year. For this purpose, the ratable portion of an 

item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing:

1. The amount of your share of S corporation loss that’s 

disallowed for the tax year, by

2. The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year.

Publication 925 (2023) 11
Proration of deductions disallowed under at-risk 

limitation. If any amount of your loss from an activity (as 

defined in Activities Covered by the At-Risk Rules, later) is 

disallowed under the at-risk rules for the tax year, a ratable 

portion of each item of deduction or loss from the activity 

is disallowed for the tax year. For this purpose, the ratable 

portion of an item of deduction or loss is the amount of 

such item multiplied by the fraction obtained by dividing:

1. The amount of the loss from the activity that’s disallowed for the tax year, by

2. The sum of all deductions from the activity for the tax 

year.

Separately identified items of deduction and loss. 

In identifying the items of deduction and loss from an activity that aren’t disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you needn’t account separately for any 

item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability 

different from that which would result were such item of 

deduction or loss not taken into account separately.

Items of deduction or loss that must be accounted for 

separately include (but aren’t limited to) items of deduction or loss that:

1. Are attributable to separate activities. See Grouping 

Your Activities, later.

2. Arise in a rental real estate activity in tax years in 

which you actively participate in such activity.

3. Arise in a rental real estate activity in tax years in 

which you don’t actively participate in such activity.

4. Arose in a tax year beginning before 1987 and weren’t 

allowed for such tax year under the basis or at-risk 

limitations.

5. Are taken into account under section 613A(d) (relating 

to limitations on certain depletion deductions).

6. Are taken into account under section 1211 (relating to 

the limitation on capital losses).

7. Are taken into account under section 1231 (relating to 

property used in a trade or business and involuntary 

conversions). See Section 1231 Gains and Losses in 

Pub. 544 for more information.

8. Are attributable to pre-enactment interests in activities. See Temporary Regulations section 

1.469-11T(c).

Excess business loss limitation that applies after 

the passive activity rules. If you are a noncorporate taxpayer and have allowable business losses after considering first the at-risk limitations and then the passive loss 

limitations (Form 8582), your losses may be subject to the 

excess business loss limitation. After considering all the 

other loss limitations, complete Form 461, Limitation on 

Business Losses, to figure the amount of your excess 

business loss. See Form 461 and its instructions for details on the excess business loss limitation.

Grouping Your Activities

You can treat one or more trade or business activities, or 

rental activities, as a single activity if those activities form 

an appropriate economic unit for measuring gain or loss 

under the passive activity rules.

Grouping is important for a number of reasons. If you 

group two activities into one larger activity, you need only 

show material participation in the activity as a whole. But if 

the two activities are separate, you must show material 

participation in each one. On the other hand, if you group 

two activities into one larger activity and you dispose of 

one of the two, then you have disposed of only part of your 

entire interest in the activity. But if the two activities are 

separate and you dispose of one of them, then you have 

disposed of your entire interest in that activity.

Grouping can also be important in determining whether 

you meet the 10% ownership requirement for actively participating in a rental real estate activity.

Appropriate Economic Units

Generally, to determine if activities form an appropriate 

economic unit, you must consider all the relevant facts 

and circumstances. You can use any reasonable method 

of applying the relevant facts and circumstances in grouping activities. The following factors have the greatest 

weight in determining whether activities form an appropriate economic unit. All of the factors don’t have to apply to 

treat more than one activity as a single activity. The factors 

that you should consider are:

1. The similarities and differences in the types of trades 

or businesses;

2. The extent of common control;

3. The extent of common ownership;

4. The geographical location; and

5. The interdependencies between or among activities, 

which may include the extent to which the activities:

a. Buy or sell goods between or among themselves,

b. Involve products or services that are generally provided together,

c. Have the same customers,

d. Have the same employees, or

e. Use a single set of books and records to account 

for the activities.

Example 1. Jackie owns a bakery and a movie theater 

at a shopping mall in Baltimore and a bakery and movie 

theater in Philadelphia. Based on all the relevant facts and 

circumstances, there may be more than one reasonable 

method for grouping Jackie's activities. For example, 

Jackie may be able to group the movie theaters and the 

bakeries into:

• One activity,

12 Publication 925 (2023)
• A movie theater activity and a bakery activity,

• A Baltimore activity and a Philadelphia activity, or

• Four separate activities.

Example 2. Pat is a partner in ABC partnership, which 

sells nonfood items to grocery stores. Pat is also a partner 

in DEF (a trucking business). ABC and DEF are under 

common control. The main part of DEF's business is 

transporting goods for ABC. DEF is the only trucking business in which Pat is involved. Based on the rules of this 

section, Pat treats ABC's wholesale activity and DEF's 

trucking activity as a single activity.

Consistency and disclosure requirement. Generally, 

when you group activities into appropriate economic units, 

you may not regroup those activities in a later tax year. 

You must meet any disclosure requirements of the IRS 

when you first group your activities and when you add or 

dispose of any activities in your groupings.

However, if the original grouping is clearly inappropriate 

or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, 

you must regroup the activities and comply with any disclosure requirements of the IRS.

See Disclosure Requirement, later.

Regrouping by the IRS. If any of the activities resulting 

from your grouping isn’t an appropriate economic unit and 

one of the primary purposes of your grouping (or failure to 

regroup) is to avoid the passive activity rules, the IRS may 

regroup your activities.

Rental activities. In general, you can’t group a rental activity with a trade or business activity. However, you can 

group them together if the activities form an appropriate 

economic unit and:

• The rental activity is insubstantial in relation to the 

trade or business activity;

• The trade or business activity is insubstantial in relation to the rental activity; or

• Each owner of the trade or business activity has the 

same ownership interest in the rental activity, in which 

case the part of the rental activity that involves the 

rental of items of property for use in the trade or business activity may be grouped with the trade or business activity.

Example. Finley and Taylor are married and file a joint 

return. Healthy Food, an S corporation, is a grocery store 

business. Finley is Healthy Food's only shareholder. Plum 

Tower, an S corporation, owns and rents out the building. 

Taylor is Plum Tower's only shareholder. Plum Tower rents 

part of its building to Healthy Food. Plum Tower's grocery 

store rental business and Healthy Food's grocery business aren’t insubstantial in relation to each other.

Finley and Taylor file a joint return, so they’re treated as 

one taxpayer for purposes of the passive activity rules. 

The same owner (Finley and Taylor) owns both Healthy 

Food and Plum Tower with the same ownership interest 

(100% in each). If the grouping forms an appropriate 

economic unit, as discussed earlier, Finley and Taylor can 

group Plum Tower's grocery store rental and Healthy 

Food's grocery business into a single trade or business 

activity.

Grouping of real and personal property rentals. In 

general, you can’t treat an activity involving the rental of 

real property and an activity involving the rental of personal property as a single activity. However, you can treat 

them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property.

Certain activities may not be grouped: limited partnerships and limited entrepreneurs. In general, if you 

own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group 

that activity with any other activity in another type of business.

• Holding, producing, or distributing motion picture films 

or video tapes.

• Farming.

• Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). For a 

list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules, 

later.

• Exploring for, or exploiting, oil and gas resources.

• Exploring for, or exploiting, geothermal deposits.

If you own an interest as a limited partner or a limited 

entrepreneur in an activity described in the list above, you 

may group that activity with another activity in the same 

type of business if the grouping forms an appropriate economic unit, as discussed earlier.

Limited entrepreneur. A limited entrepreneur is a 

person who:

• Has an interest in an enterprise other than as a limited 

partner, and

• Doesn’t actively participate in the management of the 

enterprise.

Certain activities may not be grouped: trading activities. A trading activity of trading personal property is 

not a passive activity. Personal property is any personal 

property that is actively traded (for example, financial securities). A taxpayer who does not materially participate in 

a trading activity is prohibited from grouping the activity 

with any other activity including any other trading activity. 

The prohibition on grouping is effective for tax years beginning on or after March 22, 2021. If you are a calendar 

year taxpayer, the new provisions apply to you beginning 

in calendar year 2022.

Activities conducted through another entity. A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using 

the rules discussed in this section. Once the entity groups 

Publication 925 (2023) 13
its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this 

section):

• With each other,

• With activities conducted directly by you, or

• With activities conducted through other entities.

You may not treat activities grouped together by 

the entity as separate activities.

Personal service and closely held corporations. 

You may group an activity conducted through a personal 

service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. See Material 

Participation, earlier, and Significant Participation Passive 

Activities, later.

Publicly traded partnership (PTP). You may not 

group activities conducted through a PTP with any other 

activity, including an activity conducted through another 

PTP.

Partial dispositions. If you dispose of substantially all of 

an activity during your tax year, you may treat the part disposed of as a separate activity. However, you can do this 

only if you can show with reasonable certainty:

• The amount of deductions and credits disallowed in 

prior years under the passive activity rules that’s allocable to the part of the activity disposed of, and

• The amount of gross income and any other deductions and credits for the current tax year that are allocable to the part of the activity disposed of.

Regrouping Due to Net Investment Income 

Tax

You may be able to regroup your activities, as described 

below, if you’re subject to the Net Investment Income Tax 

(NIIT) for the first time. For detailed information, see Regulations section 1.469-11(b)(3)(iv).

Regrouping on an original return. Under the NIIT 

“fresh start” election, you may regroup for the first tax year 

you are subject to the NIIT (without regard to the effect of 

regrouping). You may regroup only once under this election and that regrouping will apply to the tax year for which 

you regroup and all future tax years. You are eligible to regroup if:

1. You were not previously subject to the NIIT;

2. The amount you would have entered on Form 8960, 

line 12, without the regrouping, would have been 

greater than zero; and

3. The amount you would have entered on Form 8960, 

line 13, without the regrouping, would have been 

greater than the amount you would have entered on 

Form 8960, line 14, without the regrouping.

CAUTION

!

Regrouping on an amended return. You may regroup 

your activities on an amended tax return, but only if you 

were not subject to the NIIT on your original return (or previously amended return). You are eligible if:

1. You were not previously subject to the NIIT for the tax 

year for which you are filing an amended return or any 

prior tax year;

2. The changes on the amended return cause you to be 

subject to the NIIT for the first time beginning in the 

tax year for which you are amending the return;

3. The limitation period for assessments under Code 

section 6501 hasn’t ended;

4. The changes on your amended return cause the 

amount on Form 8960, line 12, of your amended return to be greater than zero; and

5. The changes on your amended return cause the 

amount on Form 8960, line 13, of your amended return to be greater than the amount entered on Form 

8960, line 14.

This rule applies equally to changes to modified adjusted gross income or net investment income upon an IRS 

examination.

Manner of regrouping. If you regroup your activities under this rule, you must attach to your original or amended 

return, as applicable, a statement that satisfies the requirements described in Regrouping under Disclosure Requirement, later.

Disclosure Requirement

For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. You’re required to report certain changes to your groupings that occur during the tax year to the IRS. If you fail to report these 

changes, each trade or business activity or rental activity 

will be treated as a separate activity. You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax 

return for the year in which you first discovered the failure 

to disclose. If the IRS discovered the failure to disclose, 

you must have reasonable cause for not making the required disclosure.

New grouping. You must file a written statement with 

your original income tax return for the first tax year in 

which two or more activities are originally grouped into a 

single activity. The statement must provide the names, addresses, and employer identification numbers (EINs), if 

applicable, for the activities being grouped as a single activity. In addition, the statement must contain a declaration 

that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the 

passive activity rules.

Addition to an existing grouping. You must file a written statement with your original income tax return for the 

tax year in which you add a new activity to an existing 

14 Publication 925 (2023)
group. The statement must provide the name, address, 

and EIN, if applicable, for the activity that’s being added 

and for the activities in the existing group. In addition, the 

statement must contain a declaration that the activities 

make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules.

Regrouping. You must file a written statement with your 

original income tax return for the tax year in which you regroup the activities. The statement must provide the 

names, addresses, and EINs, if applicable, for the activities that are being regrouped. If two or more activities are 

being regrouped into a single activity, the statement must 

contain a declaration that the regrouped activities make 

up an appropriate economic unit for the measurement of 

gain or loss under the passive activity rules. In addition, 

the statement must contain an explanation of the material 

change in the facts and circumstances that made the original grouping clearly inappropriate.

Groupings by partnerships and S corporations. Partnerships and S corporations aren’t subject to the rules for 

new grouping, addition to an existing grouping, or regrouping. Instead, they must comply with the disclosure 

instructions for grouping activities provided in their Form 

1065, U.S. Return of Partnership Income, or Form 1120-S, 

U.S. Income Tax Return for an S Corporation, whichever is 

applicable.

The partner or shareholder isn’t required to make a 

separate disclosure of the groupings disclosed by the entity unless the partner or shareholder:

• Groups together any of the activities that the entity 

doesn’t group together,

• Groups the entity's activities with activities conducted 

directly by the partner or shareholder, or

• Groups an entity's activities with activities conducted 

through another entity.

A partner or shareholder may not treat activities grouped together by the entity as separate activities.

Recharacterization

of Passive Income

Net income from the following passive activities may have 

to be recharacterized and excluded from passive activity 

income.

• Significant participation passive activities,

• Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation,

• Equity-financed lending activities,

• Rental of property incidental to development activities,

• Rental of property to nonpassive activities, and

• Licensing of intangible property by

pass-through entities.

If you’re engaged in or have an interest in one of these activities during the tax year (either directly or through a 

partnership or an S corporation), combine the income and 

losses from the activity to determine if you have a net loss 

or net income from that activity.

If the result is a net loss, treat the income and losses 

the same as any other income or losses from that type of 

passive activity (trade or business activity or rental activity).

If the result is net income, don’t enter any of the income 

or losses from the activity or property on Form 8582 or its 

separate parts, as they are recharacterized as nonpassive. Instead, enter income or losses on the form and 

schedules you normally use. However, see Significant 

Participation Passive Activities, later, if the activity is a significant participation passive activity and you also have a 

net loss from a different significant participation passive 

activity.

Limit on recharacterized passive income. The total 

amount that you treat as nonpassive income under the 

rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities can’t exceed 

the greatest amount that you treat as nonpassive income 

under any one of these rules.

Investment income and investment expense. To figure your investment interest expense limitation on Form 

4952, treat as investment income any net passive income 

recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity.

Significant Participation

Passive Activities

A significant participation passive activity is any trade or 

business activity in which you participated for more than 

100 hours during the tax year but didn’t materially participate.

If your gross income from all significant participation 

passive activities is more than your deductions from those 

activities, a part of your net income from each significant 

participation passive activity is treated as nonpassive income.

Corporations. An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are 

true.

• The corporation isn’t treated as materially participating 

in the activity for the year.

• One or more individuals, each of whom is treated as 

significantly participating in the activity, directly or indirectly, hold (in total) more than 50% (by value) of the 

corporation's outstanding stock.

Worksheet A. Complete Worksheet A. Significant Participation Passive Activities if you have income or losses from 

any significant participation activity. Begin by entering the 

name of each activity in the left column.

Publication 925 (2023) 15
Column (a). Enter the number of hours you participated in each activity and total the column.

If the total is more than 500, don’t complete Worksheet 

A or B. None of the activities are passive activities because you satisfy test 4 for material participation. (See 

Material participation tests, earlier.) Report all the income 

and losses from these activities on the forms and schedules you normally use. Don’t include the income and losses on Form 8582.

Column (b). Enter the net loss, if any, from the activity. 

Net loss from an activity means either:

• The activity's current-year net loss (if any) plus 

prior-year unallowed losses (if any), or

• The excess of prior-year unallowed losses over the 

current-year net income (if any). Enter -0- here if the 

prior-year unallowed loss is the same as the current-year net income.

Column (c). Enter net income (if any) from the activity. 

Net income means the excess of the current-year net income from the activity over any prior-year unallowed losses from the activity.

Column (d). Combine amounts in the Totals row for 

columns (b) and (c) and enter the total net income or net 

loss in the Totals row of column (d). If column (d) is a net 

loss, skip Worksheet B. Significant Participation Activities 

With Net Income. Include the income and losses in Part V 

of Form 8582 (or Worksheet 2 in the Instructions for Form 

8810).

Worksheet A. Significant Participation Passive Activities Keep for Your Records

Name of activity (a) Hours of 

participation

(b) Net loss (c) Net income (d) Combine totals of 

cols. (b) and (c)

( )

( )

( )

( )

( )

( )

( )

Totals ( )

Worksheet B. On Worksheet B. Significant Participation 

Activities With Net Income, list only the significant participation passive activities that have net income as shown in 

column (c) of Worksheet A.

Column (a). Enter the net income of each activity from 

column (c) of Worksheet A.

Column (b). Divide each of the individual net income 

amounts in column (a) by the total of column (a). The result is a ratio. In column (b), enter the ratio for each activity 

as a decimal (rounded to at least three places). The total 

of these ratios must equal 1.000.

Column (c). Multiply the amount in the Totals row of 

column (d) of Worksheet A by each of the ratios in column 

(b). Enter the results in column (c).

Column (d). Subtract column (c) from column (a). To 

this figure, add the amount of prior-year unallowed losses 

(if any) that reduced the current-year net income. Enter 

the result in column (d). Enter these amounts on Part V of 

Form 8582 or Worksheet 2 in the Instructions for Form 

8810. (See also Limit on recharacterized passive income, 

earlier.)

Rental of Nondepreciable Property

If you have net passive income (including prior-year unallowed losses) from renting property in a rental activity, and 

less than 30% of the unadjusted basis of the property is 

subject to depreciation, you treat the net passive income 

as nonpassive income.

Example. Charlie acquires vacant land for $300,000, 

constructs improvements at a cost of $100,000, and 

leases the land and improvements to a tenant. Charlie 

then sells the land and improvements for $600,000, realizing a gain of $200,000 on the disposition.

The unadjusted basis of the improvements ($100,000) 

equals 25% of the unadjusted basis of all property 

($400,000) used in the rental activity.

Charlie's net passive income from the activity (which is 

figured with the gain from the disposition, including gain 

from the improvements) is treated as nonpassive income.

16 Publication 925 (2023)
Worksheet B. Significant Participation Activities With Net 

Income Keep for Your Records

Name of activity 

with net income (a) Net income (b) Ratio(see instructions)

(c) Nonpassive 

income

(see instructions) 

(d) Passive income 

(subtract col. (c) from col. (a))

Totals 1.000

Equity-Financed

Lending Activities

If you have gross income from an equity-financed lending 

activity, the lesser of the net passive income or the 

equity-financed interest income is nonpassive income.

For more information, see Temporary Regulations section 1.469-2T(f)(4).

Rental of Property Incidental

to a Development Activity

Net income from this type of activity will be treated as nonpassive income if all of the following apply.

• You recognize gain from the sale, exchange, or other 

disposition of the rental property during the tax year.

• You started to rent the property less than 12 months 

before the date of disposition.

• You materially participated or significantly participated 

for any tax year in an activity that involved the performance of services for the purpose of enhancing the 

value of the property (or any other item of property if 

the basis of the property disposed of is determined in 

whole or in part by reference to the basis of that item 

of property).

For more information, see Regulations section 

1.469-2(f)(5).

Rental of Property to

a Nonpassive Activity

If you rent property to a trade or business activity in which 

you materially participated, net rental income from the 

property is treated as nonpassive income. This rule 

doesn’t apply to net income from renting property under a 

written binding contract entered into before February 19, 

1988. It also doesn’t apply to property described earlier 

under Rental of Property Incidental to a Development Activity.

Licensing of Intangible Property

by Pass-Through Entities

Net royalty income from intangible property held by a 

pass-through entity in which you own an interest may be 

treated as nonpassive royalty income. This applies if you 

acquired your interest in the pass-through entity after the 

partnership, S corporation, estate, or trust created the intangible property or performed substantial services or incurred substantial costs for developing or marketing the 

intangible property.

This recharacterization rule doesn’t apply if:

1. The expenses reasonably incurred by the entity in developing or marketing the property exceed 50% of the 

gross royalties from licensing the property that are includible in your gross income for the tax year, or

2. Your share of the expenses reasonably incurred by 

the entity in developing or marketing the property for 

all tax years exceeded 25% of the fair market value of 

your interest in the intangible property at the time you 

acquired your interest in the entity.

For purposes of (2) above, capital expenditures are 

taken into account for the entity's tax year in which the expenditure is chargeable to a capital account, and your 

share of the expenditure is figured as if it were allowed as 

a deduction for the tax year.

Dispositions

Any passive activity losses (but not credits) that haven’t 

been allowed (including current-year losses) are generally 

allowed in full in the tax year in which you dispose of your 

entire interest in the passive (or former passive) activity. 

However, for the losses to be allowed, you must dispose 

of your entire interest in the activity in a transaction in 

which all realized gain or loss is recognized. Also, the person acquiring the interest from you must not be related to 

you.

Publication 925 (2023) 17
If you have a capital loss on the disposition of an 

interest in a passive activity, the loss may be limited. For individuals, your capital loss deduction is 

limited to the amount of your capital gains plus the lower 

of $3,000 ($1,500 in the case of a married individual filing 

a separate return) or the excess of your capital losses over 

capital gains. See Pub. 544 for more information.

Example. Carter earned a $60,000 salary and owned 

one passive activity through a 5% interest in the B Limited 

Partnership. In 2023, Carter sold that entire partnership interest to an unrelated person for $30,000. Carter’s adjusted basis in the partnership interest was $42,000, and 

Carter had carried over $2,000 of ordinary passive activity 

deductions from the activity.

Carter's deductible loss for 2023 is $5,000, figured as 

follows.

Amount realized ......................... $30,000 

Minus: adjusted basis ..................... –42,000 

Capital loss ............................ $12,000 

Minus: capital loss limit ..................... –3,000 

Capital loss carryover ..................... $9,000 

Allowable capital loss on sale ................. $3,000 

Carryover losses allowable .................. 2,000 

Total current deductible loss ................. $5,000 

Carter deducts the $5,000 total current deductible loss 

in 2023 and must carry over the remaining $9,000 capital 

loss, which isn’t subject to the passive activity loss limit. 

Carter will treat it like any other capital loss carryover.

Installment sale of an entire interest. If you sell your 

entire interest in a passive activity through an installment 

sale, to figure the loss for the current year that isn’t limited 

by the passive activity rules, multiply your overall loss (not 

including losses allowed in prior years) by a fraction. The 

numerator of the fraction is the gain recognized in the current year, and the denominator is the total gain from the 

sale minus all gains recognized in prior years.

Example. Riley has a total gain of $10,000 from the 

sale of an entire interest in a passive activity. Under the installment method, Riley reports $2,000 of gain each year, 

including the year of sale. For the first year, 20% 

(2,000/10,000) of the losses are allowed. For the second 

year, 25% (2,000/8,000) of the remaining losses are allowed.

Partners and S corporation shareholders. Generally, 

any gain or loss on the disposition of a partnership interest 

must be allocated to each trade or business, rental, or investment activity in which the partnership owns an interest. If you dispose of your entire interest in a partnership, 

the passive activity losses from the partnership that 

haven’t been allowed are generally allowed in full. They 

will also be allowed if the partnership (other than a PTP) 

disposes of all the property used in that passive activity.

CAUTION

!

If you don’t dispose of your entire interest, the gain or 

loss allocated to a passive activity is treated as passive 

activity income or deduction in the year of disposition. 

This includes any gain recognized on a distribution of 

money from the partnership that you receive in excess of 

the adjusted basis of your partnership interest.

These rules also apply to the disposition of stock in an 

S corporation.

Dispositions by gift. If you give away your interest in a 

passive activity, the unused passive activity losses allocable to the interest can’t be deducted in any tax year. Instead, the basis of the transferred interest must be increased by the amount of these losses.

Dispositions by death. If a passive activity interest is 

transferred because the owner dies, unused passive activity losses are allowed (to a certain extent) as a deduction 

against the decedent's income in the year of death. The 

decedent's losses are allowed only to the extent they exceed the amount by which the transferee's basis in the 

passive activity has been increased under the rules for determining the basis of property acquired from a decedent. 

For example, if the basis of an interest in a passive activity 

in the hands of a transferee is increased by $6,000 and 

unused passive activity losses of $8,000 were allocable to 

the interest at the date of death, then the decedent's deduction for the tax year would be limited to $2,000 ($8,000 

− $6,000).

If you inherited property from a decedent who died in 

2010, special rules may apply if the executor of the estate 

filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. For more information, see 

Pub. 4895, Tax Treatment of Property Acquired From a 

Decedent Dying in 2010, which is available at 

IRS.gov/pub/irs-prior/p4895--2011.pdf.

Partial dispositions. If you dispose of substantially all of 

an activity during your tax year, you may be able to treat 

the part of the activity disposed of as a separate activity. 

See Partial dispositions under Grouping Your Activities, 

earlier.

How To Report Your

Passive Activity Loss

More than one form or schedule may be required for reporting your passive activities. The actual number of forms 

depends on the number and types of activities you must 

report. Some forms and schedules that may be required 

are:

• Schedule C (Form 1040), Profit or Loss From Business;

• Schedule D (Form 1040), Capital Gains and Losses;

• Schedule E (Form 1040), Supplemental Income and 

Loss;

• Schedule F (Form 1040), Profit or Loss From Farming;

• Form 4797, Sales of Business Property;

• Form 6252, Installment Sale Income;

18 Publication 925 (2023)
• Form 8582, Passive Activity Loss Limitations;

• Form 8582-CR, Passive Activity Credit Limitations; 

and

• Form 8949, Sales and Other Dispositions of Capital 

Assets.

Regardless of the number or complexity of passive activities you have, you should use only one Form 8582. If 

you need additional lines for any of the Form 8582 parts, 

you can either use copies of page 1, page 2, and/or 

page 3 of Form 8582, whichever is applicable, or your own 

schedule that’s in the same format as the applicable part.

For examples and further information, see the Form 

8582 instructions.

At-Risk Limits

The at-risk rules limit your losses from most activities to 

your amount at risk in the activity. You treat any loss that’s 

disallowed because of the at-risk limits as a deduction 

from the same activity in the next tax year. If your losses 

from an at-risk activity are allowed, they’re subject to recapture in later years if your amount at risk is reduced below zero.

You must apply the at-risk rules before the passive activity rules discussed in the first part of this 

publication.

Loss defined. A loss is the excess of allowable deductions from the activity for the year (including depreciation 

or amortization allowed or allowable and disregarding the 

at-risk limits) over income received or accrued from the 

activity during the year. Income doesn’t include income 

from the recapture of previous losses (discussed, later, 

under Recapture Rule).

Form 6198. Use Form 6198 to figure how much loss from 

an activity you can deduct.

1. File Form 6198 with your tax return if:

a. You have a loss from any part of an activity that’s 

covered by the at-risk rules, and

b. You aren’t at risk for some of your investment in 

the activity.

2. File Form 6198 if you’re engaged in an activity included in (6) under Activities Covered by the At-Risk 

Rules, later, and you have borrowed amounts described in Certain borrowed amounts excluded under 

At-Risk Amounts, later.

Loss limits for partners and S corporation shareholders. Separate limits may apply to a partner's or shareholder's distributive share of an item of deduction or loss 

from a partnership or S corporation, respectively. The limits determine the amount each partner or shareholder can 

deduct on their own return. These limits and the order in 

which they apply are:

1. The adjusted basis of:

CAUTION

!

a. The partner's partnership interest, or

b. The shareholder's stock plus any loans the shareholder makes to the corporation,

2. The at-risk rules, and

3. The passive activity rules.

See Limitations on Losses, Deductions, and Credits in 

Partner's Instructions for Schedule K-1 (Form 1065) and 

Shareholder's Instructions for Schedule K-1 (Form 

1120-S).

See Coordination with other limitations on deductions 

that apply before the passive activity rules, earlier.

See also Excess business loss limitation that applies 

after the passive activity rules, earlier, for limitations that 

may apply after an allowable passive activity loss is determined.

Who Is Affected?

The at-risk limits apply to individuals (including partners 

and S corporation shareholders), estates, trusts, and certain closely held C corporations.

Closely held C corporation. For the at-risk rules, a C 

corporation is a closely held corporation if at any time during the last half of the tax year, more than 50% in value of 

its outstanding stock is owned, directly or indirectly, by or 

for five or fewer individuals.

To figure if more than 50% in value of the stock is 

owned by five or fewer individuals, apply the following 

rules.

1. Stock owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned 

proportionately by its shareholders, partners, or beneficiaries.

2. An individual is considered to own the stock owned 

directly or indirectly by or for their family. Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal 

descendants.

3. If a person holds an option to buy stock, they are considered to be the owner of that stock.

4. When applying rule (1) or (2), stock considered 

owned by a person under rule (1) or (3) is treated as 

actually owned by that person. Stock considered 

owned by an individual under rule (2) isn’t treated as 

owned by the individual for again applying rule (2) to 

consider another the owner of that stock.

5. Stock that may be considered owned by an individual 

under either rule (2) or (3) is considered owned by the 

individual under rule (3).

Publication 925 (2023) 19
Activities Covered

by the At-Risk Rules

If you’re involved in one of the following activities as a 

trade or business or for the production of income, you’re 

subject to the at-risk rules.

1. Holding, producing, or distributing motion picture films 

or video tapes.

2. Farming.

3. Leasing section 1245 property, including personal 

property and certain other tangible property that’s depreciable or amortizable. See Section 1245 property, 

later.

4. Exploring for, or exploiting, oil and gas.

5. Exploring for, or exploiting, geothermal deposits (for 

wells started after September 1978).

6. Any other activity not included in (1) through (5) that’s 

carried on as a trade or business or for the production 

of income.

Section 1245 property. Section 1245 property includes 

any property that is or has been subject to depreciation or 

amortization and is:

1. Personal property,

2. Other tangible property (other than a building or its 

structural components) that’s:

a. Used in manufacturing, production, extraction, or 

furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services;

b. A research facility used for the activities in (a); or

c. A facility used in any of the activities in (a) for the 

bulk storage of fungible commodities,

3. Real property (other than property described in (2)) 

with an adjusted basis that was reduced by certain 

amortization deductions listed in section 1245(a)(3)

(C) of the Internal Revenue Code,

4. A single-purpose agricultural or horticultural structure, 

or

5. A storage facility (other than a building or its structural 

components) used for the distribution of petroleum.

Exception for holding real property placed in service 

before 1987. The at-risk rules don’t apply to the holding 

of real property placed in service before 1987. They also 

don’t apply to the holding of an interest acquired before 

1987 in a pass-through entity engaged in holding real 

property placed in service before 1987. This exception 

doesn’t apply to holding mineral property.

Personal property and services that are incidental to 

making real property available as living accommodations 

are included in the activity of holding real property. For example, making personal property, such as furniture, and 

services available when renting a hotel or motel room or a 

furnished apartment is considered incidental to making 

real property available as living accommodations.

Exception for equipment leasing by a closely held 

corporation. If a closely held corporation is actively engaged in equipment leasing, the equipment leasing is 

treated as a separate activity not covered by the at-risk 

rules. A closely held corporation is actively engaged in 

equipment leasing if 50% or more of its gross receipts for 

the tax year is from equipment leasing. Equipment leasing 

means the leasing, purchasing, servicing, and selling of 

equipment that’s section 1245 property.

However, equipment leasing doesn’t include the leasing of master sound recordings and similar contractual arrangements for tangible or intangible assets associated 

with literary, artistic, or musical properties, such as books, 

lithographs of artwork, or musical tapes. A closely held 

corporation can’t exclude these leasing activities from the 

at-risk rules nor count them as equipment leasing for the 

gross receipts test.

The equipment leasing exclusion also isn’t available for 

leasing activities related to other at-risk activities, such as 

motion picture films and video tapes, farming, oil and gas 

properties, and geothermal deposits. For example, if a 

closely held corporation leases a video tape, it can’t exclude this leasing activity from the at-risk rules under the 

equipment leasing exclusion.

Controlled group of corporations. A controlled 

group of corporations is subject to special rules for the 

equipment leasing exclusion. See section 465(c) of the Internal Revenue Code.

Special exception for qualified corporations. A qualified corporation isn’t subject to the at-risk limits for any 

qualifying business carried on by the corporation. Each 

qualifying business is treated as a separate activity.

Qualified corporation. A qualified corporation is a 

closely held C corporation, defined earlier, that isn’t:

• A personal holding company, or

• A personal service corporation (defined in section 

269A(b) of the Internal Revenue Code, but determined 

by substituting 5% for 10%).

Qualifying business. A qualifying business is any active business if all of the following apply.

1. During the entire 12-month period ending on the last 

day of the tax year, the corporation had at least:

a. One full-time employee whose services were in 

the active management of the business, and

b. Three full-time nonowner employees whose services were directly related to the business. A nonowner employee is an employee who doesn’t own 

more than 5% in value of the outstanding stock of 

the corporation at any time during the tax year. 

(The rules for constructive ownership of stock in 

section 318 of the Internal Revenue Code apply. 

However, in applying these rules, an owner of 5% 

or more, rather than 50% or more, of the value of a 

corporation's stock is considered to own a 

20 Publication 925 (2023)
proportionate share of any stock owned by the 

corporation.)

2. Deductions due to the business that are allowable to 

the corporation as business expenses and as contributions to certain employee benefit plans for the tax 

year exceed 15% of the gross income from the business.

3. The business isn’t an excluded business. Generally, 

an excluded business means equipment leasing as 

defined, earlier, under Exception for equipment leasing by a closely held corporation, and any business involving the use, exploitation, sale, lease, or other disposition of master sound recordings, motion picture 

films, video tapes, or tangible or intangible assets associated with literary, artistic, musical, or similar properties.

Separation of Activities

Generally, you treat your activity involving each film or 

video tape, item of leased section 1245 property, farm, oil 

and gas property, or geothermal property as a separate 

activity. In addition, each investment that isn’t a part of a 

trade or business is treated as a separate activity. 

Leasing by a partnership or S corporation. For a partnership or S corporation, treat all leasing of section 1245 

property that’s placed in service in any tax year of the partnership or S corporation as one activity.

Aggregation of Activities

Activities described in (6) under Activities Covered by the 

At-Risk Rules, earlier, that constitute a trade or business 

are treated as one activity if:

• You actively participate in the management of the 

trade or business, or

• The trade or business is carried on by a partnership or 

S corporation and 65% or more of its losses for the tax 

year is allocable to persons who actively participate in 

the management of the trade or business.

Similar rules apply to activities described in (1) through (5) 

of that earlier discussion.

Active participation. Active participation depends on all 

the facts and circumstances. Factors that indicate active 

participation include making decisions involving the operation or management of the activity, performing services 

for the activity, and hiring and discharging employees. 

Factors that indicate a lack of active participation include 

lack of control in managing and operating the activity, having authority only to discharge the manager of the activity, 

and having a manager of the activity who is an independent contractor rather than an employee.

Partners and S corporation shareholders. Partners or 

shareholders may aggregate activities of their partnership 

or S corporation within each of the following categories.

• Films and video tapes,

• Farms,

• Oil and gas properties, and

• Geothermal properties.

For example, if a partnership or S corporation produces 

two films or video tapes, the partners or S corporation 

shareholders may treat the production of both films or 

video tapes as one activity for purposes of the at-risk 

rules.

At-Risk Amounts

You’re at risk in any activity for:

1. The money and adjusted basis of property you contribute to the activity, and

2. Amounts you borrow for use in the activity if:

a. You’re personally liable for repayment, or

b. You pledge property (other than property used in 

the activity) as security for the loan.

Amounts borrowed. You’re at risk for amounts borrowed 

to use in the activity if you’re personally liable for repayment. You’re also at risk if the amounts borrowed are secured by property other than property used in the activity. 

In this case, the amount considered at risk is the net fair 

market value of your interest in the pledged property. The 

net fair market value of property is its fair market value 

(determined on the date the property is pledged) less any 

prior (or superior) claims to which it’s subject. However, no 

property will be taken into account as security if it’s directly 

or indirectly financed by debt that’s secured by property 

you contributed to the activity.

If you borrow money to finance a contribution to 

an activity, you can’t increase your amount at risk 

by the contribution and the amount borrowed to finance the contribution. You may increase your at-risk 

amount only once.

Certain borrowed amounts excluded. Even if you’re 

personally liable for the repayment of a borrowed amount 

or you secure a borrowed amount with property other than 

property used in the activity, you aren’t considered at risk if 

you borrowed the money from a person having an interest 

in the activity or from someone related to a person (other 

than you) having an interest in the activity. This doesn’t apply to:

• Amounts borrowed by a corporation from a person 

whose only interest in the activity is as a shareholder 

of the corporation,

• Amounts borrowed from a person having an interest in 

the activity as a creditor, or

• Amounts borrowed after May 3, 2004, secured by real 

property used in the activity of holding real property 

(other than mineral property) that, if nonrecourse, 

would be qualified nonrecourse financing.

CAUTION

!

Publication 925 (2023) 21
Related persons. Related persons include:

• Members of a family, but only an individual's brothers 

and sisters, half brothers and half sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.);

• Two corporations that are members of the same controlled group of corporations determined by applying a 

10% ownership test;

• The fiduciaries of two different trusts, or the fiduciary 

and beneficiary of two different trusts, if the same person is the grantor of both trusts;

• A tax-exempt educational or charitable organization 

and a person who directly or indirectly controls it (or a 

member of whose family controls it);

• A corporation and an individual who owns directly or 

indirectly more than 10% of the value of the outstanding stock of the corporation;

• A trust fiduciary and a corporation of which more than 

10% in value of the outstanding stock is owned directly or indirectly by or for the trust or by or for the 

grantor of the trust;

• The grantor and fiduciary, or the fiduciary and beneficiary, of any trust;

• A corporation and a partnership if the same persons 

own more than 10% in value of the outstanding stock 

of the corporation and more than 10% of the capital interest or the profits interest in the partnership;

• Two S corporations if the same persons own more 

than 10% in value of the outstanding stock of each 

corporation;

• An S corporation and a regular corporation if the same 

persons own more than 10% in value of the outstanding stock of each corporation;

• A partnership and a person who owns directly or indirectly more than 10% of the capital or profits of the 

partnership;

• Two partnerships if the same persons directly or indirectly own more than 10% of the capital or profits of 

each;

• Two persons who are engaged in business under 

common control (within the meaning of section 52(a) 

and (b)); and

• An executor of an estate and a beneficiary of that estate.

To determine the direct or indirect ownership of the outstanding stock of a corporation, apply the following rules.

1. Stock owned directly or indirectly by or for a corporation, partnership, estate, or trust is considered owned 

proportionately by or for its shareholders, partners, or 

beneficiaries.

2. Stock owned directly or indirectly by or for an individual's family is considered owned by the individual. The 

family of an individual includes only brothers and sisters, half brothers and half sisters, a spouse, ancestors, and lineal descendants.

3. Any stock in a corporation owned by an individual 

(other than by applying rule (2)) is considered owned 

directly or indirectly by or for the individual's partner.

4. When applying rule (1), (2), or (3), stock considered 

owned by a person under rule (1) is treated as actually owned by that person. But, if a person constructively owns stock because of rule (2) or (3), they don’t 

own the stock for purposes of applying either rule (2) 

or (3) to make another person the constructive owner 

of the same stock.

Effect of government price support programs. A government target price program or other government price 

support programs for a product that you grow doesn’t, 

without agreements limiting your costs, reduce the amount 

you have at risk.

Effect of increasing amounts at risk in subsequent 

years. Any loss that’s allowable in a particular year reduces your at-risk investment (but not below zero) as of 

the beginning of the next tax year and in all succeeding 

tax years for that activity. If you have a loss that’s more 

than your at-risk amount, the loss disallowed won’t be allowed in later years unless you increase your at-risk 

amount. Losses that are suspended because they’re 

greater than your investment that’s at risk are treated as a 

deduction for the activity in the following year. Consequently, if your amount at risk increases in later years, you 

may deduct previously suspended losses to the extent 

that the increases in your amount at risk exceed your losses in later years. However, your deduction of suspended 

losses may be limited by the passive loss rules.

Amounts Not at Risk

You aren’t considered at risk for amounts protected 

against loss through nonrecourse financing, guarantees, 

stop loss agreements, or other similar arrangements.

Nonrecourse financing. Nonrecourse financing is financing for which you aren’t personally liable. If you borrow money to contribute to an activity and the lender's 

only recourse is to your interest in the activity or the property used in the activity, the loan is a nonrecourse loan.

You aren’t considered at risk for your share of any nonrecourse loan used to finance an activity or to acquire 

property used in the activity unless the loan is secured by 

property not used in the activity.

However, you’re considered at risk for qualified nonrecourse financing secured by real property used in an activity of holding real property. Qualified nonrecourse financing is financing for which no one is personally liable 

for repayment and that’s:

• Borrowed by you in connection with the activity of 

holding real property,

• Secured by real property used in the activity,

22 Publication 925 (2023)
• Not convertible from a debt obligation to an ownership 

interest, and

• Loaned from or guaranteed by any federal, state, or local government, or borrowed by you from a qualified 

person.

Other types of property used as security. The rules 

in the next two paragraphs apply to any financing incurred 

after August 3, 1998. You can also choose to apply these 

rules to financing you obtained before August 4, 1998. If 

you do that, you must reduce the amounts at risk as a result of applying these rules to years ending before August 

4, 1998, to the extent they increase the losses allowed for 

those years.

In determining whether qualified nonrecourse financing 

is secured only by real property used in the activity of 

holding real property, disregard property that’s incidental 

to the activity of holding real property. Also, disregard 

other property if the total gross fair market value of that 

property is less than 10% of the total gross fair market 

value of all the property securing the financing.

For this purpose, treat yourself as owning directly your 

proportional share of the assets in any partnership in 

which you own, directly or indirectly, an equity interest.

Qualified person. A qualified person is a person who 

actively and regularly engages in the business of lending 

money. The most common example is a bank.

However, none of the following persons can be a qualified person.

• A person related to you in one of the ways listed under 

Related persons, earlier. However, a person related to 

you may be a qualified person if the nonrecourse financing is commercially reasonable and on the same 

terms as loans involving unrelated persons.

• A person from which you acquired the property or a 

person related to that person.

• A person who receives a fee due to your investment in 

the real property or a person related to that person.

Other loss limiting arrangements. Any capital you 

have contributed to an activity isn’t at risk if you’re protected against economic loss by an agreement or arrangement for compensation or reimbursement. For example, 

you aren’t at risk if you will be reimbursed for part or all of 

any loss because of a binding agreement between yourself and another person.

Example 1. Some commercial feedlots reimburse investors against any loss sustained on sales of the fed livestock above a stated dollar amount per head. Under such 

stop loss orders, the investor is at risk only for the portion 

of the investor's capital for which the investor isn’t entitled 

to a reimbursement.

Example 2. You’re personally liable for a mortgage, 

but you separately obtain insurance to compensate you 

for any payments you must actually make because of your 

personal liability. You’re considered at risk only to the extent of the uninsured portion of the personal liability to 

which you’re exposed. You can include in the amount you 

have at risk the amount of any premium that you paid from 

your personal assets for the insurance. However, if you 

obtain casualty insurance or insurance protecting yourself 

against tort liability, it doesn’t affect the amount you’re otherwise considered to have at risk.

Reductions of

Amounts at Risk

The amount you have at risk in any activity is reduced by 

any losses allowed in previous years under the at-risk 

rules. It may also be reduced because of distributions you 

received from the activity, debts changed from recourse to 

nonrecourse, or the initiation of a stop loss or similar 

agreement. If the amount at risk is reduced below zero, 

your previously allowed losses are subject to recapture, as 

explained next.

Recapture Rule

If the amount you have at risk in any activity at the end of 

any tax year is less than zero, you must recapture at least 

part of your previously allowed losses. You do this by adding to your income from the activity for that year the lesser 

of the following amounts.

• The negative at-risk amount (treated as a positive 

amount); or

• The total amount of losses deducted in previous tax 

years beginning after 1978, minus any amounts you 

previously added to your income from that activity under this recapture rule.

Don’t use the recapture income to reduce any net loss 

from the activity for the tax year. Instead, treat the recaptured amount as a deduction for the activity in the next tax 

year.

Pre-1979 activity. If the amount you had at risk in an activity at the end of your tax year that began in 1978 was 

less than zero, you apply the preceding rule for the recapture of losses by substituting that negative amount for 

zero. For example, if your at-risk amount for that tax year 

was minus $50, you will recapture losses only when your 

at-risk amount goes below minus $50.

How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, 

forms, or instructions, go to IRS.gov to find resources that 

can help you right away.

Preparing and filing your tax return. After receiving all 

your wage and earnings statements (Forms W-2, W-2G, 

1099-R, 1099-MISC, 1099-NEC, etc.); unemployment 

compensation statements (by mail or in a digital format) or 

other government payment statements (Form 1099-G); 

and interest, dividend, and retirement statements from 

banks and investment firms (Forms 1099), you have 

Publication 925 (2023) 23
several options to choose from to prepare and file your tax 

return. You can prepare the tax return yourself, see if you 

qualify for free tax preparation, or hire a tax professional to 

prepare your return.

Free options for tax preparation. Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

• Free File. This program lets you prepare and file your 

federal individual income tax return for free using software or Free File Fillable Forms. However, state tax 

preparation may not be available through Free File. Go 

to IRS.gov/FreeFile to see if you qualify for free online 

federal tax preparation, e-filing, and direct deposit or 

payment options.

• VITA. The Volunteer Income Tax Assistance (VITA) 

program offers free tax help to people with 

low-to-moderate incomes, persons with disabilities, 

and limited-English-speaking taxpayers who need 

help preparing their own tax returns. Go to IRS.gov/

VITA, download the free IRS2Go app, or call 

800-906-9887 for information on free tax return preparation.

• TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly 

those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. 

Go to IRS.gov/TCE or download the free IRS2Go app 

for information on free tax return preparation.

• MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military 

OneSource. For more information, go to 

MilitaryOneSource (MilitaryOneSource.mil/MilTax).

Also, the IRS offers Free Fillable Forms, which can 

be completed online and then e-filed regardless of income.

Using online tools to help prepare your return. Go to 

IRS.gov/Tools for the following.

• The Earned Income Tax Credit Assistant (IRS.gov/

EITCAssistant) determines if you’re eligible for the 

earned income credit (EIC).

• The Online EIN Application (IRS.gov/EIN) helps you 

get an employer identification number (EIN) at no 

cost.

• The Tax Withholding Estimator (IRS.gov/W4App) 

makes it easier for you to estimate the federal income 

tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

• The First-Time Homebuyer Credit Account Look-up 

(IRS.gov/HomeBuyer) tool provides information on 

your repayments and account balance.

• The Sales Tax Deduction Calculator (IRS.gov/

SalesTax) figures the amount you can claim if you 

itemize deductions on Schedule A (Form 1040).

Getting answers to your tax questions. On 

IRS.gov, you can get up-to-date information on 

current events and changes in tax law.

• IRS.gov/Help: A variety of tools to help you get answers to some of the most common tax questions.

• IRS.gov/ITA: The Interactive Tax Assistant, a tool that 

will ask you questions and, based on your input, provide answers on a number of tax topics.

• IRS.gov/Forms: Find forms, instructions, and publications. You will find details on the most recent tax 

changes and interactive links to help you find answers 

to your questions.

• You may also be able to access tax information in your 

e-filing software.

Need someone to prepare your tax return? There are 

various types of tax return preparers, including enrolled 

agents, certified public accountants (CPAs), accountants, 

and many others who don’t have professional credentials. 

If you choose to have someone prepare your tax return, 

choose that preparer wisely. A paid tax preparer is:

• Primarily responsible for the overall substantive accuracy of your return,

• Required to sign the return, and

• Required to include their preparer tax identification 

number (PTIN).

Although the tax preparer always signs the return, 

you're ultimately responsible for providing all the 

information required for the preparer to accurately 

prepare your return and for the accuracy of every item reported on the return. Anyone paid to prepare tax returns 

for others should have a thorough understanding of tax 

matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.

Employers can register to use Business Services Online. The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure 

W-2 filing options to CPAs, accountants, enrolled agents, 

and individuals who process Form W-2, Wage and Tax 

Statement, and Form W-2c, Corrected Wage and Tax 

Statement.

IRS social media. Go to IRS.gov/SocialMedia to see the 

various social media tools the IRS uses to share the latest 

information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our 

highest priority. We use these tools to share public information with you. Don’t post your social security number 

(SSN) or other confidential information on social media 

sites. Always protect your identity when using any social 

networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, 

Spanish, and ASL.

• Youtube.com/irsvideos.

CAUTION

!

24 Publication 925 (2023)
• Youtube.com/irsvideosmultilingua.

• Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal 

(IRSVideos.gov) contains video and audio presentations 

for individuals, small businesses, and tax professionals.

Online tax information in other languages. You can 

find information on IRS.gov/MyLanguage if English isn’t 

your native language.

Free Over-the-Phone Interpreter (OPI) Service. The 

IRS is committed to serving taxpayers with limited-English 

proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and 

every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.

Accessibility Helpline available for taxpayers with 

disabilities. Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and 

future accessibility products and services available in alternative media formats (for example, braille, large print, 

audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or 

account-related issues, go to IRS.gov/LetUsHelp.

Note. Form 9000, Alternative Media Preference, or 

Form 9000(SP) allows you to elect to receive certain types 

of written correspondence in the following formats.

• Standard Print.

• Large Print.

• Braille.

• Audio (MP3).

• Plain Text File (TXT).

• Braille Ready File (BRF).

Disasters. Go to IRS.gov/DisasterRelief to review the 

available disaster tax relief.

Getting tax forms and publications. Go to IRS.gov/

Forms to view, download, or print all the forms, instructions, and publications you may need. Or, you can go to 

IRS.gov/OrderForms to place an order.

Getting tax publications and instructions in eBook 

format. Download and view most tax publications and instructions (including the Instructions for Form 1040) on 

mobile devices as eBooks at IRS.gov/eBooks.

IRS eBooks have been tested using Apple's iBooks for 

iPad. Our eBooks haven’t been tested on other dedicated 

eBook readers, and eBook functionality may not operate 

as intended.

Access your online account (individual taxpayers 

only). Go to IRS.gov/Account to securely access information about your federal tax account.

• View the amount you owe and a breakdown by tax 

year.

• See payment plan details or apply for a new payment 

plan.

• Make a payment or view 5 years of payment history 

and any pending or scheduled payments.

• Access your tax records, including key data from your 

most recent tax return, and transcripts.

• View digital copies of select notices from the IRS.

• Approve or reject authorization requests from tax professionals.

• View your address on file or manage your communication preferences.

Get a transcript of your return. With an online account, 

you can access a variety of information to help you during 

the filing season. You can get a transcript, review your 

most recently filed tax return, and get your adjusted gross 

income. Create or access your online account at IRS.gov/

Account.

Tax Pro Account. This tool lets your tax professional 

submit an authorization request to access your individual 

taxpayer IRS online account. For more information, go to 

IRS.gov/TaxProAccount.

Using direct deposit. The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, 

which securely and electronically transfers your refund directly into your financial account. Direct deposit also 

avoids the possibility that your check could be lost, stolen, 

destroyed, or returned undeliverable to the IRS. Eight in 

10 taxpayers use direct deposit to receive their refunds. If 

you don’t have a bank account, go to IRS.gov/

DirectDeposit for more information on where to find a bank 

or credit union that can open an account online.

Reporting and resolving your tax-related identity 

theft issues. 

• Tax-related identity theft happens when someone 

steals your personal information to commit tax fraud. 

Your taxes can be affected if your SSN is used to file a 

fraudulent return or to claim a refund or credit.

• The IRS doesn’t initiate contact with taxpayers by 

email, text messages (including shortened links), telephone calls, or social media channels to request or 

verify personal or financial information. This includes 

requests for personal identification numbers (PINs), 

passwords, or similar information for credit cards, 

banks, or other financial accounts.

• Go to IRS.gov/IdentityTheft, the IRS Identity Theft 

Central webpage, for information on identity theft and 

data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or 

stolen or you suspect you’re a victim of tax-related 

Publication 925 (2023) 25
identity theft, you can learn what steps you should 

take.

• Get an Identity Protection PIN (IP PIN). IP PINs are 

six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your 

SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund. 

• Go to IRS.gov/Refunds.

• Download the official IRS2Go app to your mobile device to check your refund status.

• Call the automated refund hotline at 800-829-1954.

The IRS can’t issue refunds before mid-February 

for returns that claimed the EIC or the additional 

child tax credit (ACTC). This applies to the entire 

refund, not just the portion associated with these credits.

Making a tax payment. Payments of U.S. tax must be 

remitted to the IRS in U.S. dollars. Digital assets are not 

accepted. Go to IRS.gov/Payments for information on how 

to make a payment using any of the following options.

• IRS Direct Pay: Pay your individual tax bill or estimated 

tax payment directly from your checking or savings account at no cost to you.

• Debit Card, Credit Card, or Digital Wallet: Choose an 

approved payment processor to pay online or by 

phone.

• Electronic Funds Withdrawal: Schedule a payment 

when filing your federal taxes using tax return preparation software or through a tax professional.

• Electronic Federal Tax Payment System: Best option 

for businesses. Enrollment is required.

• Check or Money Order: Mail your payment to the address listed on the notice or instructions.

• Cash: You may be able to pay your taxes with cash at 

a participating retail store.

• Same-Day Wire: You may be able to do same-day 

wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to 

ensure that the electronic payments you make online, by 

phone, or from a mobile device using the IRS2Go app are 

safe and secure. Paying electronically is quick, easy, and 

faster than mailing in a check or money order.

What if I can’t pay now? Go to IRS.gov/Payments for 

more information about your options.

• Apply for an online payment agreement (IRS.gov/

OPA) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once 

you complete the online process, you will receive immediate notification of whether your agreement has 

been approved.

CAUTION

!

• Use the Offer in Compromise Pre-Qualifier to see if 

you can settle your tax debt for less than the full 

amount you owe. For more information on the Offer in 

Compromise program, go to IRS.gov/OIC.

Filing an amended return. Go to IRS.gov/Form1040X 

for information and updates.

Checking the status of your amended return. Go to 

IRS.gov/WMAR to track the status of Form 1040-X amended returns.

It can take up to 3 weeks from the date you filed 

your amended return for it to show up in our system, and processing it can take up to 16 weeks.

Understanding an IRS notice or letter you’ve received. Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

Responding to an IRS notice or letter. You can now 

upload responses to all notices and letters using the 

Document Upload Tool. For notices that require additional 

action, taxpayers will be redirected appropriately on 

IRS.gov to take further action. To learn more about the 

tool, go to IRS.gov/Upload.

Note. You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may 

not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing 

translations in 2023. You will continue to receive communications, including notices and letters, in English until they 

are translated to your preferred language.

Contacting your local TAC. Keep in mind, many questions can be answered on IRS.gov without visiting a TAC. 

Go to IRS.gov/LetUsHelp for the topics people ask about 

most. If you still need help, TACs provide tax help when a 

tax issue can’t be handled online or by phone. All TACs 

now provide service by appointment, so you’ll know in advance that you can get the service you need without long 

wait times. Before you visit, go to IRS.gov/TACLocator to 

find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, 

under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) 

Is Here To Help You

What Is TAS?

TAS is an independent organization within the IRS that 

helps taxpayers and protects taxpayer rights. TAS strives 

to ensure that every taxpayer is treated fairly and that you 

know and understand your rights under the Taxpayer Bill 

of Rights.

CAUTION

!

26 Publication 925 (2023)
How Can You Learn About Your Taxpayer 

Rights?

The Taxpayer Bill of Rights describes 10 basic rights that 

all taxpayers have when dealing with the IRS. Go to 

TaxpayerAdvocate.IRS.gov to help you understand what 

these rights mean to you and how they apply. These are 

your rights. Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you can’t resolve 

with the IRS. And their service is free. If you qualify for 

their assistance, you will be assigned to one advocate 

who will work with you throughout the process and will do 

everything possible to resolve your issue. TAS can help 

you if:

• Your problem is causing financial difficulty for you, 

your family, or your business;

• You face (or your business is facing) an immediate 

threat of adverse action; or

• You’ve tried repeatedly to contact the IRS but no one 

has responded, or the IRS hasn’t responded by the 

date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia, 

and Puerto Rico. To find your advocate’s number:

• Go to TaxpayerAdvocate.IRS.gov/Contact-Us;

• Download Pub. 1546, The Taxpayer Advocate Service 

Is Your Voice at the IRS, available at IRS.gov/pub/irspdf/p1546.pdf;

• Call the IRS toll free at 800-TAX-FORM 

(800-829-3676) to order a copy of Pub. 1546;

• Check your local directory; or

• Call TAS toll free at 877-777-4778.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect 

many taxpayers. If you know of one of these broad issues, 

report it to TAS at IRS.gov/SAMS. Be sure to not include 

any personal taxpayer information.

Low Income Taxpayer Clinics (LITCs)

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level 

and who need to resolve tax problems with the IRS. LITCs 

can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, 

LITCs can provide information about taxpayer rights and 

responsibilities in different languages for individuals who 

speak English as a second language. Services are offered 

for free or a small fee. For more information or to find an 

LITC near you, go to the LITC page at 

TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, 

Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/

p4134.pdf.

To help us develop a more useful index, please let us know if you have ideas for index entries.

Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A

Active participation 21

Activity:

Appropriate economic unit 12

Nonpassive 7

Trade or business 4

Amounts borrowed 21

Amounts not at risk 22, 23

Appropriate economic unit 12

Assistance (See Tax help)

At-risk activities:

Aggregation of 21

Separation of 21

At-risk amounts 21

Government price support 

programs 22

Increasing amounts 22

Nonrecourse financing 22

At-risk limits 19

Closely held corporation 19

Loss defined 19

Partners 19

S corporation shareholders 19

Who is affected 19

At-risk rules:

Activities covered by 20

Exceptions to 20

Excluded business 21

Qualified corporation 20

Qualifying business 20

Recapture rule 23

B

Borrowed amounts 21

C

Closely held corporation 19

Corporations:

Closely held 8, 15

Controlled group of 20

Personal service 8, 15

Qualified 20

D

Deductions, passive activity 11

Disabled farmer 8

Disclosure requirement 14

Dispositions:

Death 18

Gift 18

Installment sale 18

Partial 14

E

Excluded business, definition of 21

F

Farmer 8

Form:

6198 19

8810 3

Former passive activity 4

G

Grouping passive activities 12

I

Income, passive activity 9

L

Limited entrepreneur 13

Limited partners 8

Publication 925 (2023) 27
M

Material participation 7, 8

Modified adjusted gross income 6

N

Nonrecourse loan 22

P

Participation 8

Active 21

Material 7

Passive activity 3, 18

Disposition 17

Former 4

Grouping 12

Limits 3

Material participation 7

Rental 5

Rules 4, 12

Who must use these rules 3

Passive activity deductions 11

Passive activity income 9

Passive income, recharacterization 

of 15

Publications (See Tax help)

Publicly traded partnership 4, 14

Q

Qualified person, nonrecourse 

financing 23

Qualifying business, at-risk 

rules 20

R

Real estate professional 8

Recapture rule under at-risk 

limits 23

Recharacterization of passive 

income 15

Reductions of amounts at risk 23

Related persons 22

Rental activity:

$25,000 offset 5

Active participation 6

Exceptions 5

Phaseout rule 6

Real estate professional 8

Retired farmer 8

S

Section 1245 property 20

Self-charged interest 9

Separate activity 21

Significant participation passive 

activities 15

Special $25,000 allowance 5

Surviving spouse of farmer 8

T

Tax help 23

Trade or business activities:

Real property 9

W

Worksheet A 15, 16

Worksheet B 16, 17

28 Publication 925 (2023)