A passive entity is generally a business or investment entity whose income comes primarily from passive sources, such as investments, royalties, or certain partnership interests rather than active business operations.
Determining whether an entity is passive can affect how income, losses, and deductions are treated under the passive activity rules.
What Types of Entities Can Qualify as Passive Entities?
- A general partnership
- A limited partnership
- A limited liability partnership (LLP)
- A trust (excluding business trusts)
What Income Qualifies an Entity as Passive?
Investment Income
- Dividends
- Interest
- Foreign currency exchange gains
- Payments related to notional principal contracts
- Option premiums
- Cash settlement or termination payments related to financial instruments
- Income received from a limited liability company (LLC)
Partnership Income
- Distributive shares of partnership income, to the extent those amounts are greater than zero
Capital Gains
- Net capital gains from the sale of real property
- Net gains from the sale of commodities traded on a commodities exchange
- Net gains from the sale of securities
Mineral and Royalty Income
- Royalties from mineral properties
- Mineral property bonuses
- Delay rental income from mineral properties
- Income from non-operating mineral interests
Why Does Passive Entity Classification Matter?
- Whether losses are currently deductible
- How income and losses are reported
- The ability to offset passive income with passive losses
- Certain state tax filing requirements
How Do I Enter Information From a Passive Entity?
Income, losses, deductions, and credits from passive entities are commonly reported to investors on a Schedule K-1.
The information from your Schedule K-1 is then transferred to the appropriate areas of your tax return, including Schedule E when applicable.
How Do I Complete Page 2 of Schedule E?
- Partnerships
- S corporations
- Estates
- Trusts
If you received a Schedule K-1, enter the information from the form into the corresponding K-1 section of the program, using the following pathway:
- Federal
- Income - Select my forms
- Less Common Income
- K-1 Earnings
Where Do I Enter My Schedule K-1 Information?
To report information from a Schedule K-1, navigate to the appropriate K-1 entry section within the program and enter the amounts exactly as shown on your form.
For detailed instructions, see our support articles covering:
- Schedule K-1 (Form 1065) for Partnerships
- Schedule K-1 (Form 1120-S) for S Corporations
- Schedule K-1 (Form 1041) for Estates and Trusts
Important
- Your ownership interest
- Whether you materially participated in the activity
- The type of income reported
- Special passive activity loss rules