Passive activity rules are an important consideration for individual taxpayers; they determine how federal tax credits can be used.
The rules provide that credits can only be used to offset passive activity income—not active trade income, business income, W-2 wages or investment income, such as stock gains.
These rules may prevent some tax-credit investors from the ability to claim or utilize the credits. Investors aren’t actively involved in the underlying business activities generating credits and, as a result, they’re passive to the activity.
Accordingly, individual taxpayers can generally only participate in purchasing tax credits if they generate income from passive activities that can be offset by these credits.