Passive income is a tax term used to identify the types of income that are earned without much physical or time based input by the taxpayer. Examples of passive income include interest, dividends, rental income and some other types of gains/losses. In general, these types of income are taxed at a different rate than active income.
However, passive income has a broader definition with business than the definition as promulgated by the Internal Revenue Code.
I love the game of Monopoly. My sons enjoy playing it too. But we all have the same complaint about the game; it takes forever to accumulate all the wealth and ultimately win the game. Being a landlord means the same thing. It will take a long time to accumulate wealth. For those of you considering becoming a landlord, there are certain business dynamics and economics you should understand.
Code Section 465 of the Internal Revenue Code defines ‘At-Risk’ as the financial value the taxpayer has in jeopardy related to the business activity the taxpayer is invested in as some form of an owner. Effectively, the taxpayer may only take losses on his tax return contingent on the loss being directly tied to invested dollars with some form of tax basis.
Passive income is a form of earning money without materially participating in the activity from which the income is derived. There are two definitions for the reader to understand. There is the common business definition and the tax code definition.
Within the family of corporations, the Internal Revenue Service (IRS) grants tax free status to S-Corporations. It is strictly an IRS term. In the IRS code, there are several subchapters pertaining to corporations; Subchapter S identifies and regulates S-Corporations. In essence, S-Corporations are a pass through entity meaning that all income, losses, credits and special deductions are pass-through to the stockholders of the company.
A K-1 is a reporting tool to the Internal Revenue Service. It is used by Partnerships, S-Corporations and Trusts to report the taxpayer’s share of income, deductions, and credits. A K-1 is similar to Form W-2 or 1099 in that the information provided informs the taxpayer of what has been reported to the Internal Revenue Service.
