8810 Instructions for Form 8810

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2018

Instructions for Form 8810

Department of the Treasury
Internal Revenue Service

Corporate Passive Activity Loss and Credit Limitations

DRAFT AS OF
September 13, 2018
Section references are to the Internal
Revenue Code unless otherwise noted.

Future Developments

For the latest information about
developments related to Form 8810 and
its instructions, such as legislation
enacted after they were published, go to
IRS.gov/Form8810.

General Instructions

Purpose of Form

Personal service corporations and closely
held corporations use Form 8810 to figure
the amount of any passive activity loss
(PAL) or credit for the current tax year and
the amount of losses and credits from
passive activities allowed on the
corporation's tax return. Form 8810 is also
used to make the election to increase the
basis of credit property when the
corporation disposes of its interest in an
activity for which it has an unused credit.
Generally, passive activities include
trade or business activities in which the
corporation did not materially participate
for the tax year, and rental activities
regardless of its participation.

Note. Individuals subject to the passive
activity rules use Form 8582, Passive
Activity Loss Limitations.

Who Must File

Personal service corporations and closely
held corporations that have losses or
credits (including prior year unallowed
losses and credits) from passive activities
must file Form 8810.
Passive activity loss (PAL). A personal
service corporation has a PAL for the year
if the total losses (including prior year
unallowed losses) from its passive
activities exceed the total income from its
passive activities. A closely held
corporation has a PAL for the year if the
total losses (including prior year unallowed
losses) from all its passive activities
exceed the sum of the total income from
all its passive activities and its net active
income.
Passive activity credit. A personal
service corporation has a passive activity
credit for the year if its credits from
passive activities (including prior year
unallowed credits) exceed the tax
attributable to net passive income. A
Aug 14, 2018

closely held corporation has a passive
activity credit for the year if its credits from
passive activities (including prior year
unallowed credits) exceed the sum of the
tax attributable to net passive income and
the tax attributable to net active income.
For more information, see Pub. 925,
Passive Activity and At-Risk Rules.

Definitions

Except as otherwise indicated, the
following terms are defined as shown
below.

Personal service corporation. A
personal service corporation is a
corporation whose principal activity for the
testing period (defined below) for the tax
year is the performance of personal
services. The services must be
substantially performed by
employee-owners. Employee-owners
must own more than 10% of the fair
market value (FMV) of the corporation's
outstanding stock on the last day of the
testing period.
Testing period. Generally, the testing
period for a tax year is the prior tax year.
The testing period for a new corporation
starts with the first day of its first tax year
and ends on the earlier of:
• The last day of its first tax year, or
• The last day of the calendar year in
which the first tax year began.
Principal activity. The principal
activity of a corporation is considered to
be the performance of personal services
if, during the testing period, the
corporation's compensation costs for the
performance of personal services are
more than 50% of its total compensation
costs.
Performance of personal services.
Personal services are those performed in
the health, law, engineering, architecture,
accounting, actuarial science, performing
arts, or consulting fields (as defined in
Temporary Regulations section
1.448-1T(e)). The term “performance of
personal services” includes any activity
involving the performance of personal
services in these areas.
Substantial performance by
employee-owners. Personal services
are substantially performed by
employee-owners if, for the testing period,
more than 20% of the corporation's
compensation costs for the performance
Cat. No. 10357E

of personal services are for services
performed by employee-owners.

Employee-owner. A person is
considered to be an employee-owner if
the person is an employee of the
corporation on any day of the testing
period, and owns any outstanding stock of
the corporation on any day of the testing
period. Stock ownership is determined
under the attribution rules of section 318,
except that “any” is substituted for “50
percent or more in value” in section 318(a)
(2)(C).

Closely held corporation. A 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 directly or indirectly owned, by or for not
more than five individuals, and the
corporation is not a personal service
corporation.
Certain organizations are treated as
individuals for this test (see section
542(a)). For rules of determining stock
ownership, see section 544 (as modified
by section 465(a)(3)).

Other Passive Activity Terms
Net income. The excess of current year
income over current year deductions from
the activity. This includes any current year
gains or losses from the disposition of
assets or an interest in the activity.
Net loss. The excess of current year
deductions over current year income from
the activity. This includes any current year
gains or losses from the disposition of
assets or an interest in the activity.
Overall gain. The excess of the “net
income” from the activity over the prior
year unallowed losses from the activity.
Overall loss. The excess of the prior year
unallowed losses from the activity over the
“net income” from the activity or the prior
year unallowed losses from the activity
plus the “net loss” from the activity.
Prior year unallowed losses. The
deductions and losses from an activity that
were disallowed under the PAL limitations
in a prior year and carried forward to the
tax year under section 469(b). See
Regulations section 1.469-1(f)(4).

Coordination With Other
Limitations

Generally, items of deduction or loss from
a passive activity are subject to other
limitations before they are subject to the
PAL limitations. Once a deduction or loss
becomes allowable under these other
limitations, the corporation must determine
whether the deduction or loss is limited
under the PAL rules. Examples include the
following.
• Basis.
• Section 163(j) interest deduction
limitations.
• At-risk limitations. See Form 6198,
At-Risk Limitations, for details on the
at-risk rules.

For purposes of this rule, each interest
in rental real estate is a separate activity,
unless the corporation elects to treat all
interests in rental real estate as one
activity. The corporation makes the
election by attaching a statement to its
original income tax return for the tax year.
See Regulations section 1.469-9(g) for
details on how to make or revoke this
election. For information on making a late
election, see Rev. Proc. 2011-34, 2011-24
I.R.B. 875, available at www.IRS.gov/irb/
2011-24_IRB.
A real property trade or business is any
real property development,
redevelopment, construction,
reconstruction, acquisition, conversion,
rental, operation, management, leasing, or
brokerage trade or business.

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 does not matter
whether the use of the property is under a
lease, a service contract, or some other
arrangement.

Note. If an activity qualifies for the
exception described above in 2018, but
has a prior year unallowed PAL, the prior
year unallowed loss is treated as a loss
from a former passive activity. See Former
Passive Activities, later.
3. A working interest in an oil or gas
well held directly or through an entity that
does not limit the corporation's liability
(such as a general partner's interest in a
partnership). In this case, it does not
matter whether the corporation materially
participated in the activity for the tax year.
If, however, the corporation's liability
was limited for part of the year (for
example, the corporation converted its
general partnership interest to a limited
partnership interest during the year), some
of the corporation's income and losses
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) for more details.
4. An activity of trading personal
property for the account of owners of
interests in the activity. For purposes of
this rule, personal property means
property that is actively traded, such as
stocks, bonds, and other securities. See
Temporary Regulations section
1.469-1T(e)(6) for more details.

Figure the average period of customer
use for a class of property 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 the ratio of the gross rental
income from that class to the activity's
total gross rental income. The activity's
average period of customer use equals
the sum of these class-by-class average
periods weighted by gross income. See
Regulations section 1.469-1(e)(3)(iii) for
more details.
Significant personal services include
only services performed by individuals. To
determine if personal services are
significant, all the 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 the use of the
property. Significant personal services do
not 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 period, 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, routine
repairs, trash collection, elevator service,
and security at entrances or perimeters.
2. Extraordinary personal services
were provided in making the rental
property available for customer use.
Extraordinary personal services are
services provided in making rental
property available for customer use only if
they are performed by individuals and the

DRAFT AS OF
September 13, 2018
In addition, certain allowances under
the PAL rules may be limited under other
rules. This includes the following.
• Capital losses allowable under the PAL
rules may be limited under the capital loss
limitations of section 1211(a).
• Percentage depletion deductions
allowable under the PAL rules may be
limited under section 613A(d).

Special Rules for
Consolidated Group

The passive activity loss and passive
activity credit of an affiliated group of
corporations filing a consolidated return
for the tax year (a consolidated group) are
determined by taking into account the
following items of each member of the
group.
• Passive activity gross income and
deductions.
• Gain or loss on dispositions.
• Net active income (for a consolidated
group treated as a closely held
corporation).
• Credits from passive activities.

Activities That Are Not
Passive Activities

The following are not classified as passive
activities. Generally, income, losses, and
credits from these activities are not
entered on Form 8810. However, losses
and credits from these activities may be
subject to limitations other than the
passive activity loss and credit rules.
1. Trade or business activities in
which the corporation materially
participated for the tax year.
2. Any rental real estate activity in
which the corporation materially
participated if the corporation was a
closely held corporation that derived more
than 50% of its gross receipts from real
property trades or businesses in which it
materially participated. For these
purposes, gross receipts do not include
portfolio income, as defined later under
Passive Activity Income.

Rental Activities

A rental activity is a passive activity even if
the corporation materially participated in
the activity unless it meets the
requirements described in item 2 in
Activities That Are Not Passive Activities
above. In addition, if the corporation
meets any of the five exceptions listed
below, the rental of the property is not
treated as a rental activity. See Reporting
Income, Deductions, Losses, and Credits
From Rental Activities below, if the
corporation meets any of the exceptions.
An activity is a rental activity if tangible
property (real or personal) is used by
-2-

Exceptions

An activity is not a rental activity if any of
the following apply.
1. The average period of customer
use (see below) of the rental property is:
a. 7 days or less, or
b. 30 days or less and significant
personal services (see below) were
provided in making the rental property
available for customer use.

Instructions for Form 8810 (2018)

customers' use of the property is
incidental to their receipt of the services.
3. Rental of the property is incidental
to a nonrental activity.
The rental of property is incidental to an
activity of holding property for investment
if the main purpose for holding the
property during the tax year is to realize a
gain from its appreciation and the gross
rental income is less than 2% of the
smaller of the unadjusted basis or the
FMV of the property.
Unadjusted basis is the cost of the
property without regard to depreciation
deductions or any other basis adjustment
described in section 1016.
The rental of property is incidental to a
trade or business activity if:
a. The corporation owned an interest
in the trade or business activity during the
tax year,
b. The rental property was mainly
used in the trade or business activity
during the tax year or during at least 2 of
the 5 preceding tax years, and
c. The gross rental income from the
property is less than 2% of the smaller of
the unadjusted basis or the FMV of the
property.
Lodging provided for the employer's
convenience to an employee or the
employee's spouse or dependents is
incidental to the activity or activities in
which the employee performs services.
4. The corporation customarily makes
the rental property available during
defined business hours for nonexclusive
use by various customers.
5. The corporation provides property
for use in a nonrental activity of a
partnership or joint venture in its capacity
as an owner of an interest in the
partnership or joint venture.
Example. If a partner contributes the
use of property to a partnership, none of
the partner's distributive share of
partnership income is income from a rental
activity unless the partnership is engaged
in a rental activity.
Also, a partner's gross income
attributable to a guaranteed payment
under section 707(c) is not income from a
rental activity. The determination of
whether the property used in the activity is
provided in the partner's capacity as an
owner of an interest in the partnership is
made on the basis of all the facts and
circumstances.

activity. The corporation then must
determine:
1. Whether the rental of the property
is a trade or business activity (see Trade
or Business Activities, later) and, if so,
2. Whether the corporation materially
participated in the activity for the tax year.
To report income, deductions, losses,
or credits from a trade or business activity
in which the corporation did not materially
participate, see Trade or business
activities without material participation
under Reporting Income, Deductions,
Losses, and Credits From Trade or
Business Activities, later.

passive activity. Report the income,
deductions, losses, and credits from the
activity on the form or schedule normally
used.
Trade or business activities without
material participation. In general, use
Worksheets 1 and 2 to determine the
amount to enter in Part I of Form 8810 for
each trade or business activity in which
the corporation did not materially
participate. If, however, the corporation
held the activity through a PTP or the
activity is a significant participation
activity, special rules apply. See Publicly
Traded Partnerships (PTPs), later. See
Significant Participation Passive Activities
under Recharacterization of Passive
Income in Pub. 925 for details about how
to report income or losses from significant
participation passive activities.
In general, if the corporation has credits
from passive activities, use Worksheet 5
to figure the amount to enter in Part II of
Form 8810. However, if the corporation
held the activity through a PTP, special
rules apply. See Credits From PTPs, later,
for details about how to report credits from
these activities.

DRAFT AS OF
September 13, 2018

Reporting Income, Deductions,
Losses, and Credits From
Rental Activities

If the corporation meets any of the five
exceptions listed above, the corporation's
rental of the property is not a rental

Instructions for Form 8810 (2018)

If the corporation meets any of the five
exceptions and the activity is a trade or
business activity in which the corporation
materially participated, report any income,
deduction, loss, or credit from the activity
on the forms or schedules normally used.
If the rental activity did not meet any of
the five exceptions, it generally is a
passive activity. Special rules apply if the
corporation conducted the rental activity
through a publicly traded partnership
(PTP) or if any of the rules described
under Recharacterization of Passive
Income, later, apply. See PAL rules for
partners in PTPs under Special
Instructions for PTPs, later.

If none of the special rules apply, use
Worksheets 1 and 2 to determine the
amount to enter in Part I of Form 8810 for
each passive rental activity. If the
corporation has credits from passive rental
activities, use Worksheet 5 to figure the
amount to enter in Part II of Form 8810.
The worksheets are located later in the
instructions.

Trade or Business
Activities

A trade or business activity is an activity
(other than a rental activity or an activity
treated as incidental to an activity of
holding property for investment) that:
1. Involves the conduct of a trade or
business (within the meaning of section
162),
2. Is conducted in anticipation of
starting a trade or business, or
3. Involves research or experimental
expenditures deductible under section
174 (or that would be if the corporation
chose to deduct rather than capitalize
them).

Reporting Income, Deductions,
Losses, and Credits From
Trade or Business Activities
Trade or business activities with material participation. If the corporation
materially participated in a trade or
business activity, that activity is not a
-3-

Material Participation

Personal service corporations and closely
held corporations materially or significantly
participate in an activity if one or more
individuals, each of whom would
materially or significantly participate in the
activity if the corporation's activity were
the individual's activity, directly or
indirectly own more than 50% (by value) of
the corporation's outstanding stock. For
this purpose, an individual's participation
in all activities other than activities of the
corporation is disregarded.
A closely held corporation also
materially participates in an activity if the
corporation satisfies the qualifying
business requirements of section 465(c)
(7)(C) (without regard to section 465(c)(7)
(C)(iv) for the excluded business
exception from the at-risk limitations).
These requirements are met if:
1. During the entire 12-month period
ending on the last day of the tax year,
substantially all the services of at least one
full-time employee of the corporation were
in the active management of the activity;
2. During the same period,
substantially all the services of at least
three full-time nonowner employees were
directly related to the activity; and
3. The deductions attributable to the
activity and allowed solely under sections
162 and 404 exceed 15% of the gross
income from the activity for the tax year.
Participation. For purposes of the
material participation tests listed below,
participation generally includes any work

the individual did (without regard to the
capacity in which the individual did it) in
connection with an activity in which the
corporation owned an interest at the time
the individual did the work.
Work is not treated as participation,
however, if the work is not work that an
owner of that type of activity would
customarily do, and if one of the
individual's main reasons for doing the
work is to avoid the disallowance of losses
or credits from the activity under the
passive activity loss and credit rules.

least as much as any other individual
(including individuals who did not own any
interest in the corporation or the activity)
for the year.
4. The activity is a significant
participation activity for the individual for
the tax year, and the individual
participated in all significant participation
activities during the year for more than 500
hours. For this purpose, an individual's
participation in all activities other than
activities of the corporation is disregarded.
A significant participation activity is any
trade or business activity in which the
individual participated for more than 100
hours during the year and in which the
individual did not materially participate
under any of the material participation
tests (other than this fourth test). For more
information regarding significant
participation, see Pub. 925.
5. The individual materially
participated in the activity (other than by
meeting this fifth test) for any 5 (whether or
not consecutive) of the 10 immediately
preceding tax years.
6. The activity is a personal service
activity in which the individual 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, law,
engineering, architecture, accounting,
actuarial science, performing arts,
consulting, or in any other trade or
business in which capital is not a material
income-producing factor.
7. Based on all the facts and
circumstances, the individual participated
in the activity on a regular, continuous,
and substantial basis during the tax year.
The individual does not materially
participate in the activity under this
seventh test, however, if the individual
participated in the activity for 100 hours or
less during the tax year. Participation in
managing the activity does not count in
determining whether the individual
materially participated under the test if:
a. Any person (except that individual)
received compensation for performing
services in the management of the activity,
or
b. Any person in the activity spent
more hours during the tax year than that
individual spent performing services in the
management of the activity (regardless of
whether the individual was compensated
for the management services).

or more individuals (each of whom would
materially participate in the activity under
test 1, 5, or 6, discussed above, for the tax
year if the corporation's activity were the
individual's activity) directly or indirectly
own more than 50% (by value) of the
corporation's outstanding stock.
The corporation is not treated as a
limited partner, however, if the corporation
was also a general partner in the
partnership at all times during the
partnership's tax year ending with or within
the corporation's tax year (or, if shorter,
during the portion of the partnership's tax
year in which the corporation directly or
indirectly owned a limited partnership
interest).

DRAFT AS OF
September 13, 2018
Proof of participation. Participation
in an activity can be proved by any
reasonable means. Contemporaneous
daily time reports, logs, or similar
documents are not required if participation
can be established by other reasonable
means. Reasonable means for this
purpose may include, but are not limited
to, the identification of services performed
over a period of time and the approximate
number of hours spent performing the
services during that period, based on
appointment books, calendars, or
narrative summaries.

Tests for investors. Work done as an
investor in an activity is not treated as
participation unless the individual was
directly involved in the day-to-day
management or operations of the activity.
For purposes of this test, work done as an
investor includes the following activities.
• 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 the individual's own use.
• Monitoring the finances or operations of
the activity in a nonmanagerial capacity.
If the individual is married for the tax
year, the individual's participation in an
activity includes any participation in the
activity during the tax year by that
individual's spouse, whether or not the
spouse owned any interest in the activity
and whether or not the individual and
spouse file a joint return for the tax year.
Tests for individuals. An individual
materially participates in an activity of the
corporation if one or more of the following
tests are satisfied.
1. The individual participated in the
activity for more than 500 hours during the
tax year.
2. The individual's participation in the
activity for the tax year was substantially
all of the participation in the activity of all
individuals (including individuals who did
not own any interest in the corporation or
the activity) for the year.
3. The individual participated in the
activity for more than 100 hours during the
tax year, and that individual participated at

Special rules for limited partners.
Generally, a limited partner cannot
materially participate in an activity.
However, the corporation is considered to
materially participate in an activity in which
it holds a limited partnership interest if one
-4-

Consolidated groups. See Regulations
section 1.469-1(h)(4) for rules for
determining whether a consolidated group
materially or significantly participates.

Grouping of Activities

Generally, one or more trade or business
activities or rental activities may be treated
as a single activity if the activities make up
an appropriate economic unit for the
measurement of gain or loss under the
passive activity rules. Whether activities
make up an appropriate economic unit
depends on all the relevant facts and
circumstances. The factors given the
greatest weight in determining whether
activities make up an appropriate
economic unit are:
1. Similarities and differences in types
of trades or businesses,
2. The extent of common control,
3. The extent of common ownership,
4. Geographical location, and
5. Interdependencies between or
among the activities. This includes the
extent to which the activities purchase or
sell goods between or among themselves,
involve products or services that are
normally provided together, have the
same customers, have the same
employees, or are accounted for with a
single set of books and records.

Example. A corporation has a
significant ownership interest in a bakery
and a movie theater in Baltimore and in a
bakery and a movie theater in
Philadelphia. Depending on all the
relevant facts and circumstances, there
may be more than one reasonable method
for grouping the activities. For instance,
the following groupings may or may not be
permissible.
• A single activity.
• A movie theater activity and a bakery
activity.
• A Baltimore activity and a Philadelphia
activity.
• Four separate activities.

Instructions for Form 8810 (2018)

Once the corporation chooses a
grouping under these rules, it must
continue using that grouping in later tax
years unless either:
• The corporation determines that the
original grouping was clearly
inappropriate, or
• A material change in the facts and
circumstances makes that grouping
clearly inappropriate.
The IRS may regroup the corporation's
activities if any of the activities resulting
from the corporation's groupings are not
an appropriate economic unit and one of
the primary purposes of the grouping (or
failure to regroup as required under
Regulations section 1.469-4(e)) is to avoid
the underlying purposes of the passive
activity rules.
The corporation must comply with
disclosure requirements for certain
changes to the corporation's groupings as
described in Disclosure Requirement,
later.

• Each other,
• Activities conducted directly by the

partner or shareholder, or
• Activities conducted through other
partnerships and corporations.
A partner or shareholder cannot treat
as separate activities those activities
grouped together by the partnership or
corporation.

activities 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
why the original grouping was clearly
inappropriate or the nature of the material
change in the facts and circumstances
that made the original grouping clearly
inappropriate.

DRAFT AS OF
September 13, 2018
Limitation on grouping certain activities. The following activities cannot be
grouped together.
1. A rental activity with a trade or
business activity unless the activities
being grouped together make up an
appropriate economic unit and:
a. The rental activity is insubstantial
relative to the trade or business activity or
vice versa, or
b. Each owner of the trade or
business activity has the same
proportionate ownership interest in the
rental activity. If so, the rental activity
portion involving the rental of property
used in the trade or business activity can
be grouped with the trade or business
activity. See Rental activities under
Grouping Your Activities in Pub. 925 for an
example.
2. An activity involving the rental of
real property with an activity involving the
rental of personal property (except
personal property provided in connection
with the real property or vice versa).
3. Any activity with another activity in
a different type of business and in which
the corporation holds an interest as a
limited partner or as a limited entrepreneur
if that other activity is holding, producing,
or distributing motion picture films or
videotapes; farming; leasing section 1245
property; or exploring for or exploiting oil
and gas resources or geothermal
deposits.
Activities conducted through partnerships and other C corporations subject to section 469. Once a partnership
or corporation determines its activities
under these rules, a partner or
shareholder can use these rules to group
those activities with:
Instructions for Form 8810 (2018)

Partial disposition of an activity.
The corporation can, for the tax year in
which there is a disposition of substantially
all of an activity, treat the part disposed of
as a separate activity if it can prove with
reasonable certainty:
1. The prior year unallowed losses
and credits, if any, allocable to the part of
the activity disposed of; and
2. The net income or loss and any
credits for the year of disposition allocable
to the disposed part of the activity.

Disclosure Requirement

A corporation is required to report to the
IRS certain changes to the corporation’s
groupings that occur during the tax year.
For more information on these disclosure
requirements, see Rev. Proc. 2010-13,
2010-4 I.R.B. 329, available at
www.IRS.gov/irb/2010-04_IRB.

New grouping. The corporation must file
a written statement with its original income
tax return for the first tax year in which two
or more activities are originally grouped as
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. The
corporation must file a written statement
with its original income tax return for the
tax year in which the corporation adds a
new activity to an existing grouping. The
statement must provide the name,
address, and EIN, if applicable, for the
activity that is being added and for the
activities in the existing grouping. 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. The corporation must file a
written statement with its original income
tax return for the tax year in which the
corporation regroups activities under
Regulations section 1.469-4(e)(2). The
statement must provide the names,
addresses, and EINs, if applicable, for the
activities that are being regrouped. If the
corporation regroups two or more
-5-

Reporting of pre-existing groupings
required only upon change. The
corporation is not required to file a written
statement reporting the grouping of the
trade or business activities and rental
activities that have been made for tax
years beginning before January 25, 2010
(pre-existing groupings), until the
corporation makes a change to the
grouping.

Effect of failure to report. If the
corporation fails to report these changes,
each trade or business activity or rental
activity will be treated as a separate
activity. The corporation will be
considered to have made a timely
disclosure if it has filed all affected income
tax returns consistent with the claimed
grouping and makes the required
disclosure on the income tax return for the
year in which the corporation first
discovered the failure to disclose. If the
IRS first discovers the failure to disclose,
however, the corporation also must have
reasonable cause for not making the
required disclosure.

Passive Activity Income
and Deductions

Take into account only passive activity
income and passive activity deductions to
figure the corporation's overall gain or
overall loss from all passive activities or
any passive activity. In figuring the PAL, a
closely held corporation subtracts both
passive activity income and net active
income from its passive activity
deductions. See the instructions for line 2,
later, for the definition of net active
income.

Self-Charged Interest

Certain “self-charged” interest income or
expense can 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 expense
result from loans between the corporation
and a partnership in which the corporation
had a direct or indirect ownership interest.
It also may result from loans between one
partnership and another if each owner in
the borrowing entity has the same
proportional ownership interest in the
lending entity. The self-charged interest

rules do not apply to the corporation's
partnership interest if the partnership
made an election under Regulations
section 1.469-7(g) to avoid the application
of these rules. See Regulations section
1.469-7 for details.

Passive Activity Income

Passive activity income includes all
income from passive activities, including
(with certain exceptions described in
Temporary Regulations section
1.469-2T(c)(2) and Regulations section
1.469-2(c)(2)) gain from the disposition of
an interest in a passive activity or property
used in a passive activity at the time of the
disposition.

• Cancellation of debt income to the
extent that at the time the debt was
discharged it was not properly allocable
under Temporary Regulations section
1.163-8T to passive activities.
Recharacterization of Passive
Income

• Dividends-received deductions for
dividends not included in passive activity
gross income.
• Interest expense, other than interest
expense properly allocable under
Temporary Regulations section 1.163-8T
to passive activities or self-charged
interest treated as a passive activity
deduction (see Self-Charged Interest
above). For example, capitalized interest
expense is not a passive activity
deduction.
• Losses from dispositions of property
that produce portfolio income or property
held for investment.
• State, local, and foreign income taxes.
• Charitable contribution deductions.
• Net operating loss deductions,
percentage depletion carryovers under
section 613A(d), and capital loss
carrybacks and carryovers.
• Deductions and losses that would have
been allowed for tax years beginning
before 1987, but for basis or at-risk
limitations.
• Net negative section 481 adjustments
allocated to activities other than passive
activities. See Temporary Regulations
section 1.469-2T(d)(7).
• Deductions for losses from fire, storm,
shipwreck, or other casualty, or from theft,
if losses similar in cause and severity do
not regularly recur in the activity.

DRAFT AS OF
September 13, 2018
Passive activity income does not
include the following.
• Income from activities that are not
passive activities, discussed earlier.
• Portfolio income, including interest,
dividends, annuities, and royalties not
derived in the ordinary course of a trade or
business, and gain or loss from the
disposition of property that produces
portfolio income or is held for investment
(see section 163(d)(5)). See Temporary
Regulations section 1.469-2T(c)(3). See
Self-Charged Interest above for an
exception.
• Personal service income, including
commissions and income from trade or
business activities in which the
corporation materially participated for the
tax year. See Temporary Regulations
section 1.469-2T(c)(4).
• Income from positive section 481
adjustments allocated to activities other
than passive activities. See Temporary
Regulations section 1.469-2T(c)(5).
• Income or gain from investments of
working capital.
• Income from an oil or gas property if the
corporation treated any loss from a
working interest in the property for any tax
year beginning after 1986 as a nonpassive
loss under the rule excluding working
interests in oil and gas wells from passive
activities, as discussed in item (3) under
Activities That Are Not Passive Activities,
earlier. See Regulations section
1.469-2(c)(6).
• Any income treated as income not from
a passive activity under Temporary
Regulations section 1.469-2T(f) and
Regulations section 1.469-2(f). See
Recharacterization of Passive Income
below.
• Overall gain from any interest in a PTP.
See Publicly Traded Partnerships (PTPs),
later.
• State, local, and foreign income tax
refunds.
• Any reimbursement of a casualty or
theft loss included in income as recovery
of all or part of a prior year loss deduction,
if the deduction for the loss was not
treated as a passive activity deduction.

Certain income from passive activities can
be recharacterized and excluded from
passive activity income. The amount of
income recharacterized equals the net
income from the sources described below.
If during the tax year the corporation
received net income from any of these
sources (either directly or through a
partnership), see Recharacterization of
Passive Income in Pub. 925 for details on
reporting net income or loss from these
sources.

Income from the following sources may
be subject to the net income
recharacterization rules.
• Significant participation passive
activities. A significant participation
passive activity is any trade or business
activity (see Trade or Business Activities,
earlier), in which the corporation is treated
as having participated for more than 100
hours during the tax year but did not
materially participate.
• Rental of property when less than 30%
of the unadjusted basis of the property is
subject to depreciation.
• Passive equity-financed lending
activities.
• Rental of property incidental to a
development activity.
• Rental of property to a nonpassive
activity.
• Acquisition of an interest in a
pass-through entity that licenses
intangible property.

Passive Activity Deductions

Passive activity deductions include all
deductions from activities that are passive
activities for the current tax year and all
deductions from passive activities that
were disallowed under the PAL rules in
prior tax years and carried forward to the
current tax year under section 469(b).
Passive activity deductions include
losses from dispositions of property used
in a passive activity at the time of the
disposition and losses from a disposition
of less than an entire interest in a passive
activity. See Dispositions below, for the
treatment of losses upon certain
dispositions of an entire interest in an
activity.
Passive activity deductions do not
include the following.
• Deductions for expenses (other than
interest expense) that are clearly and
directly allocable to portfolio income.
-6-

Former Passive Activities

A former passive activity is any activity
that was a passive activity in a prior tax
year but is not a passive activity in the
current tax year. A prior year unallowed
loss from a former passive activity is
allowed to the extent of current year
income from the activity. The following
apply.
• If the current year net income from the
activity is less than the prior year
unallowed loss, enter the prior year
unallowed loss and any current year net
income from the activity on Form 8810
and the applicable worksheets.
• If the current year net income from the
activity is more than or equal to the prior
year unallowed loss from the activity,
report the income and loss on the forms
and schedules normally used; do not enter
the amounts on Form 8810.
• If the activity has a net loss for the
current year, enter the prior year
unallowed loss (but not the current year
loss) on Form 8810 and the applicable
worksheets.
For rules about prior year unallowed
credits from former passive activities, see
section 469(f). To report a disposition of a
former passive activity, follow the rules
under Dispositions below.

Instructions for Form 8810 (2018)

Dispositions
Disposition of Less Than an
Entire Interest

Gains and losses from the disposition of
less than an entire interest in an activity
are treated as part of the net income or net
loss from the activity for the current year.

activity or a former passive activity, there
may be net income or loss and prior year
unallowed losses from the activity.
Combine all income, gains, deductions,
and losses (including any prior year
unallowed losses) from the activity for the
tax year to see if the corporation has an
overall gain or loss.
If the corporation has an overall gain
from a passive activity and also has other
passive activities to report on Form 8810,
include the income, gains, deductions,
and losses (including prior year unallowed
losses) on Worksheet 1. If this is the
corporation's only passive activity or a
former passive activity, report the income,
gains, deductions, and losses (including
prior year unallowed losses) on the forms
and schedules normally used, but do not
enter them on the worksheets or on Form
8810.
If the corporation has an overall loss
when combining all income, gains,
deductions, and losses (including any
prior year unallowed losses) from the
activity, report all the income, gains,
deductions, and losses on the forms and
schedules normally used, but do not enter
them on the worksheets or on Form 8810.

passive income should also be entered on
the forms and schedules normally used.
Allowable passive activity deductions and
losses are entered on the forms and
schedules after Form 8810 is completed
and the deductions and losses are
allocated to the activities.

Worksheet 2

DRAFT AS OF
September 13, 2018
Note. A disposition of less than
substantially all of an entire interest does
not trigger the allowance of prior year
unallowed losses.

Disposition of an Entire Interest

If the corporation disposed of its entire
interest in a passive activity or a former
passive activity to an unrelated party in a
fully taxable transaction during the tax
year, the losses allocable to the activity for
the year are not limited by the PAL rules. A
fully taxable transaction is a transaction in
which all the realized gain or loss is
recognized.

If the corporation is using the
installment method to report this kind of
disposition, figure the loss for the current
year that is not limited by the PAL rules by
multiplying the corporation's overall loss
(which does not include losses allowed in
prior years) by the following fraction.
Gain recognized in the current year
Unrecognized gain as of the beginning
of the current year

Unallowed passive activity credits,
unlike unallowed PALs, are not allowable
when the corporation disposes of its
interest in an activity. However, the
corporation can elect to increase the basis
of the credit property by the amount of the
original basis reduction of the property to
the extent that the credit has not been
allowed under the passive activity rules.
Unallowed passive activity credits that are
not used to increase the basis of the credit
property are carried forward until they are
allowed. To make the election, complete
Part III of Form 8810. No basis adjustment
can be elected on a partial disposition of
the corporation's interest in a passive
activity.
A partner in a PTP is not treated as
having disposed of an entire interest in an
activity of a PTP until there is an entire
disposition of the partner's interest in the
PTP.
See Dispositions in Pub. 925 for
additional information about dispositions,
including rules for dispositions by gift or
death.

Reporting an Entire Disposition
When the corporation completely
disposes of an entire interest in a passive
Instructions for Form 8810 (2018)

Note. Members of a consolidated group,
see Regulations section 1.469-1(h)(6) and
Temporary Regulations sections
1.469-1T(h)(7) and (8) for rules on
applying the PAL rules to dispositions of
property and other intercompany
transactions.

Specific Instructions

Note. Complete Worksheets 1 and 2
before completing Form 8810, Part I.

Worksheet 1

Use Worksheet 1 to figure the total current
year income, gains, deductions, and
losses for each passive activity.
Lines 1 through 4. Enter on these lines
the gross receipts and other income from
passive activities and passive activity
gains reported on Schedule D (Form
1120) and Form 8949, as applicable, and
Form 4797, Sales of Business Property.
Line 5. Enter total income on this line and
in Worksheet 2, column (a).
Lines 6a through 6l. Enter passive
activity deductions.
Lines 8 and 9. Enter on line 8 losses
from passive activities reported on
Schedule D (Form 1120) and Form 8949,
as applicable. Enter on line 9 losses from
passive activities reported on Form 4797.
Line 10. Enter total deductions and
losses on this line and in Worksheet 2,
column (b).
Gross receipts, gains from the sale of
business assets, capital gains, and other
-7-

Columns (a) and (b). Enter in column
(a) the total income for the current year
shown on Worksheet 1, line 5. Enter in
column (b) the total deductions and losses
shown in Worksheet 1, line 10 .
Column (c). Enter the prior year
unallowed losses from Worksheet 4,
column (c), located in the 2017
Instructions for Form 8810.

Totals. Enter the totals from Worksheet
2, columns (a), (b), and (c), on Form 8810,
lines 1a, 1b, and 1c.
Columns (d) and (e). Combine income,
deductions, and losses in columns (a)
through (c) for each activity. Enter any
overall gain in column (d) or any overall
loss in column (e). Do not enter the
amounts from columns (d) and (e) on
Form 8810. These amounts will be used
when Form 8810 is completed to figure
the loss allowed for the current year.

Part I. 2018
Passive Activity Loss
Lines 1d and 3

If line 1d or 3 shows net income or zero, all
the deductions and losses are allowed
including any prior year unallowed losses
entered on line 1c. Enter the deductions
on the appropriate lines of Form 1120,
U.S. Corporation Income Tax Return. Also
enter any losses from Form 4797 or Form
8949 (and Schedule D (Form 1120)) on
Form 1120, if applicable, including any
prior year unallowed losses that are
properly entered on those forms.
If the prior year unallowed losses
include deductions that would have been
reported on Form 1120, page 1, instead of
on Form 4797 or Form 8949 (and
Schedule D (Form 1120), as applicable),
include the prior year unallowed losses on
the appropriate line along with any current
year deduction or loss from that line.
Example. The corporation had $1,000
of deductions for current year repairs and
maintenance and $500 of deductions for
prior year unallowed repairs and
maintenance. Enter $1,500 as the
deduction for repairs and maintenance
allowed from passive activities on the
proper line.

Line 2. Closely Held
Corporations

Closely held corporations can offset the
loss, if any, on line 1d with net active
income. Net active income is the
corporation's taxable income for the tax
year, determined without regard to the
following items.
• Net passive income or loss.
• Portfolio income. See Passive Activity
Income, earlier.
• Deductions attributable to portfolio
income described in Temporary
Regulations section 1.469-2T(d)(2)(i), (ii),
and (iv).
• Interest expense allocated under
Temporary Regulations section 1.163-8T
to a portfolio expenditure (within the
meaning of Temporary Regulations
section 1.163-8T(b)(6)).
• Gain on the disposition of substantially
appreciated property formerly held for
investment. See Regulations section
1.469-2(c)(2)(iii)(F).
• Gross income from certain oil or gas
properties treated under Regulations
section 1.469-2(c)(6) as not from a
passive activity.
• Gross income and deductions from any
trade or business activity of trading certain
personal property described in Temporary
Regulations section 1.469-1T(e)(6), but
only if the corporation did not materially
participate in the activity for the tax year.
If the corporation disposed of its entire
interest in a passive activity to an
unrelated party in a fully taxable
transaction, figure net active income by
taking into account an overall loss from
that activity only to the extent it exceeds
overall gain from all other passive
activities (the gain, if any, shown on Form
8810, line 1d).
If there is an overall loss from all other
passive activities (Form 8810, line 1d, is a
loss), figure net active income by taking
into account all of the overall loss from that
activity.

Worksheet 1—Computation of Income,
Gains, Deductions, and Losses for
Worksheet 2

Keep for Your Records

Name of Activity:

Name of Activity:

DRAFT AS OF
September 13, 2018

Line 4. Total Deductions and
Losses Allowed

Worksheet 2, columns (d) and (e), show
whether an activity had an overall gain or
loss.
Overall gain. A corporation with an
overall gain for any of the activities in

1.

Gross receipts . . . . . . . . . . . .

2.

Schedule D and Form 8949 gains
(see inst.) . . . . . . . . . . . . . . .

3.

Form 4797 gains

4.

Other passive income

5.

Total income. Add lines 1 through
4. Enter the result here and in
Worksheet 2, column (a) . . . . .

6.

Deductions:

a.

Cost of goods sold . . . . . . . . .

b.

Compensation of officers

c.

Salaries and wages

d.

Repairs and
maintenance . . . . . . . . . . . . .

e.

Bad debts

f.

Rents . . . . . . . . . . . . . . . . .

g.

Taxes and licenses . . . . . . . . .

h.

Interest . . . . . . . . . . . . . . . .

i.

Depreciation . . . . . . . . . . . . .

j.

Depletion . . . . . . . . . . . . . . .

k.

Advertising . . . . . . . . . . . . . .

. . . . . . . . . .

. . . . . . .

▶

. . . . . . . . . . . .

. . . . .

. . . . . . . .

. . . . . . . . . . . . . .

l.

Other deductions . . . . . . . . . .

7.

Total deductions. Add lines 6a
through 6l . . . . . . . . . . . . . .

8.

Schedule D and Form 8949 losses
(see inst.) . . . . . . . . . . . . . . .

9.

Form 4797 losses . . . . . . . . . .

10. Total deductions and losses.
Add lines 7 through 9. Enter the
result here and in Worksheet 2,
column (b) . . . . . . . . . . . . . .

▶

Worksheet 2, column (d), will report all of
the deductions and losses listed in
Worksheet 1 and any prior year unallowed
losses in Worksheet 2 for that activity on
the appropriate lines of Form 1120 and on
Form 8949 and Schedule D (Form 1120),
or Form 4797, as applicable.

activities that show an overall loss in
column (e). Use Worksheet 3 to figure the
unallowed deductions and losses to be
carried forward to Worksheet 4. Use
Worksheet 4 to figure the allowed
deductions and losses to report on the
forms and schedules for 2018.

Overall loss. A corporation uses
Worksheets 3 and 4 for any of the

-8-

Instructions for Form 8810 (2018)

Keep for Your Records

Worksheet 2 for Form 8810, Lines 1a, 1b, and 1c
Current Year
Name of Activity

(a) Income
(Line 1a)

Prior Year

(b) Deductions and
Losses (Line 1b)

Overall Gain or Loss

(c) Unallowed
Losses (Line 1c)

(d) Gain

(e) Loss

DRAFT AS OF
September 13, 2018
Totals. Enter on Form 8810,
lines 1a, 1b, and 1c . . . . . . . . . .

▶

Worksheet 3—Allocation of Unallowed Deductions and Losses

Keep for Your Records

If the corporation has activities in Worksheet 2 with an overall loss in column (e), use Worksheet 3 to figure the unallowed deductions and losses for
each activity.
If any of the activities in Worksheet 2 had an overall gain in column (d), all of the deductions and losses (including prior year unallowed losses) for
that activity are allowed in full. Enter the deductions on the appropriate line of Form 1120 and enter any losses on Form 4797, Form 8949, and
Schedule D (Form 1120), as applicable.
Prior year unallowed losses from 2017. If there were prior year unallowed losses from 2017, include the prior year unallowed losses on the
appropriate line along with any current year deduction or loss for that line. See the example in the instructions for lines 1d and 3 above. Prior year
unallowed losses from Form 4797 and Form 8949 should have been kept separate in 2017, and should be identified as “prior year unallowed
losses” on Form 4797 and Form 8949.
Column (a). Enter the loss from Worksheet 2, column (e).
Column (b). Divide each of the individual losses in column (a) by the total of all the losses in column (a) and enter the ratio for each of the activities
in column (b). The total of all the ratios should equal 1.00.
Column (c). Multiply the unallowed loss from Form 8810, line 3, by each of the ratios in column (b) and enter the results in column (c).

(a) Loss From
Worksheet 2, Column (e)

Name of Activity

Totals . . . . . . . . . . . . . . . . . . . . . . . . . .

Worksheet 4

▶

Use Worksheet 4 to allocate the
unallowed deductions and losses for each
activity among Form 1120 deductions and
any losses to be reported on Form 4797,

Instructions for Form 8810 (2018)

(b) Ratio

(c) Unallowed Deductions
and Losses

1.00

or Form 8949 and Schedule D (Form
1120), as applicable.
If the unallowed loss is reported on one
form or schedule, skip the following
example and complete Worksheet 4.
-9-

If the unallowed loss is from losses
reported on more than one form or
schedule, allocate the unallowed loss from
among the net losses as follows.

Keep for Your Records

Worksheet 4—Allowed Deductions and Losses
Name of Activity:

1.

(a) Deductions and
Losses

(b) Ratio

(c) Unallowed
Deductions and
Losses

(d) Allowed
Deductions and
Losses

Form 1120 deductions:
a. Cost of goods sold . . . . . . . . . . . . . . . .

DRAFT AS OF
September 13, 2018
b. Compensation of officers . . . . . . . . . . .

c. Salaries and wages . . . . . . . . . . . . . . .
d. Repairs and maintenance

..........

e. Bad debts . . . . . . . . . . . . . . . . . . . . . .

f. Rents . . . . . . . . . . . . . . . . . . . . . . . . . .
g. Taxes and licenses . . . . . . . . . . . . . . .

h. Interest . . . . . . . . . . . . . . . . . . . . . . . .
i. Depreciation . . . . . . . . . . . . . . . . . . . . .

j. Depletion . . . . . . . . . . . . . . . . . . . . . . .
k. Advertising

.....................

l. Other deductions . . . . . . . . . . . . . . . . .
Total Form 1120 deductions: . . . . . . . .
2.

Schedule D and Form 8949 losses . . . . . .

3.

Form 4797 losses . . . . . . . . . . . . . . . . . .

▶

Name of Activity:

1.

1.00

(a) Deductions and
Losses

(b) Ratio

(c) Unallowed
Deductions and
Losses

(d) Allowed
Deductions and
Losses

Form 1120 deductions:
a. Cost of goods sold . . . . . . . . . . . . . . . .
b. Compensation of officers . . . . . . . . . . .
c. Salaries and wages . . . . . . . . . . . . . . .
d. Repairs and maintenance

..........

e. Bad debts . . . . . . . . . . . . . . . . . . . . . .
f. Rents . . . . . . . . . . . . . . . . . . . . . . . . . .
g. Taxes and licenses . . . . . . . . . . . . . . .
h. Interest . . . . . . . . . . . . . . . . . . . . . . . .
i. Depreciation . . . . . . . . . . . . . . . . . . . . .
j. Depletion . . . . . . . . . . . . . . . . . . . . . . .
k. Advertising

.....................

l. Other deductions . . . . . . . . . . . . . . . . .
Total Form 1120 deductions . . . . . . . . .
2.

Schedule D and Form 8949 losses . . . . . .

3.

Form 4797 losses . . . . . . . . . . . . . . . . . .

▶

1.00

-10-

Instructions for Form 8810 (2018)

Example. The corporation has one
passive activity. The activity has an
unallowed loss of $18,000 in Worksheet 3,
column (c), and the following net losses
and net gain.
Gross receipts
Deductions

Form 1120

$100,000
120,000

Line 1, column (b). Divide each of the
individual Form 1120 deductions shown in
column (a) by the total of all of the Form
1120 deductions in column (a) and enter
the ratio for each of the deductions in
column (b). The total of the ratios must
equal 1.00.
Column (c). Allocate the portion of the
loss in Worksheet 3, column (c), among
the Form 1120 deductions by multiplying
the unallowed loss attributable to the total
Form 1120 deductions by each of the
ratios in column (b). Enter the portion of
the unallowed loss in Worksheet 3,
column (c), that is attributable to a Form
8949 (or Schedule D (Form 1120)) or
Form 4797 loss in column (c) of this
worksheet.

Losses from passive activities the
corporation holds through a PTP generally
can be used only to offset income or gain
from passive activities of the same PTP.
Any unallowed loss from a PTP passive
activity is carried forward and allowed in a
tax year when the corporation has passive
income from the same PTP or when the
corporation disposes of its entire interest
in that PTP to an unrelated person in a
fully taxable transaction.

DRAFT AS OF
September 13, 2018
Net loss

($20,000)

Form 8949
Form 4797
Gain
$1,000 Gain
$5,000
Loss
(2,000) Loss
(2,000)
Net loss

($1,000) Net gain

$3,000

Add the net losses of $20,000 and
$1,000, for a total of $21,000. Divide the
net loss reported on each form by the total
of the net losses, and multiply the result by
the unallowed loss of $18,000, as shown
below.
Form
1120:

Form 8949:

$20,000
x $18,000= $17,143
$21,000

$1,000
x $18,000 = $857
$21,000

On Form 4797, report the $2,000 loss
and the $5,000 gain. On Worksheet 4,
enter the $17,143 of unallowed
deductions allocated to Form 1120 in
column (c) on the line for total Form 1120
deductions. Enter the $857 of unallowed
Form 8949 losses in column (c) of line 2.
Use Worksheet 4 to allocate the $17,143
to the Form 1120 deductions and show
the allowed and unallowed Form 8949
loss.
Line 1, column (a). Enter the current
year deductions for each Form 1120
expense (Worksheet 1, lines 6a through
6l) plus any prior year unallowed Form
1120 deduction for that activity. For
example, if Worksheet 1, line 6i, shows
current year depreciation for the activity of
$2,200, and the activity had prior year
unallowed depreciation of $1,200, enter
$3,400 on Worksheet 4, line 1i, column
(a).
Line 2, column (a). Enter any Form 8949
losses (or any Schedule D (Form 1120)
losses, as applicable) from Worksheet 1,
line 8, plus any prior year unallowed
losses from the 2017 Form 8949 for that
activity.
Line 3, column (a). Enter any Form 4797
losses from Worksheet 1, line 9, plus any
prior year unallowed Form 4797 losses for
that activity.

Instructions for Form 8810 (2018)

Column (d). Subtract column (c) from
column (a) and enter the results in this
column. Enter the deductions allowed for
Form 1120 on the proper lines of Form
1120. Enter the allowed losses on the
appropriate forms.

Publicly Traded
Partnerships (PTPs)

A PTP is a partnership whose interests are
traded on an established securities market
or are readily tradable on a secondary
market (or its substantial equivalent).
An established securities market
includes any national securities exchange
and any local exchange registered under
the Securities Exchange Act of 1934 or
exempted from registration because of the
limited volume of transactions. It also
includes any over-the-counter market.
A secondary market generally exists
where a person stands ready to make a
market in the interest. An interest is
treated as readily tradable if the interest is
regularly quoted by persons, such as
brokers or dealers, who are making a
market in the interest.
The substantial equivalent of a
secondary market exists where there is no
identifiable market maker, but holders of
interests have a readily available, regular,
and ongoing opportunity to sell or
exchange interests through a public
means of obtaining or providing
information on offers to buy, sell, or
exchange interests. Similarly, the
substantial equivalent of a secondary
market exists where prospective buyers
and sellers have the opportunity to buy,
sell, or exchange interests in a timeframe
and with the regularity and continuity that
the existence of a market maker would
provide.

Special Instructions for PTPs

Section 469(k) provides that the passive
activity rules and limitations must be
applied separately to items from each
PTP.
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Income from passive activities the
corporation holds through a PTP cannot
be used to offset losses from passive
activities the corporation holds through
another PTP or losses from any other
passive activities.

PAL rules for partners in PTPs. Do not
include any income, gains, deductions, or
losses from PTP passive activities on
Form 8810. Instead, use the following
rules to figure and report income, gains,
deductions, and losses from passive
activities held through each PTP that the
corporation owned an interest in during
the tax year.

1. Combine any current year income,
gains, deductions, and losses, and prior
year unallowed losses to see if there is an
overall gain or loss. Include only the same
types of income and losses that would be
included in figuring net income or loss
from a non-PTP passive activity (see
Passive Activity Income and Deductions,
earlier).
2. If there is an overall gain, the net gain
portion (total income in excess of total
deductions and losses) is nonpassive
income. Report the income, deductions,
and losses on the forms and schedules
normally used.
3. If there is an overall loss (other than in
a year in which the corporation disposed
of its entire interest in the PTP), the
deductions and losses are allowed to the
extent of the income, and the excess
deductions and losses are carried forward
for use in a future year when there is
income to offset them. Report the income
and the loss allowed to the extent of
income on the form or schedule normally
used.

Part II. 2018 Passive
Activity Credits

Use Form 8810, Part II, to figure the
amount of credits allowed from passive
activities for the current year and the
amount that is unallowed and carried
forward.

Worksheet 5

Complete Worksheet 5 before completing
Part II. Use Worksheet 5 to figure the
amounts to enter on Form 8810, lines 5a
and 5b.

Worksheet 5—For Form 8810, Lines 5a and 5b
Name of Activity

(a) Current Year
Credits (Line 5a)

From Form

Keep for Your Records
(b) Prior Year
Unallowed Credits
(Line 5b)

(c) Total Credits
(Add Columns (a)
and (b))

DRAFT AS OF
September 13, 2018
Totals. Enter on Form 8810, lines 5a and 5b . . . . . . . . . . . . . . . . . . .

Column (a). Convert any current year
qualified expenditures into credits and
complete Form 3800, General Business
Credit, before beginning Worksheet 5.
See Cooperatives next for special
instructions for certain cooperatives.
Enter the credits from Form 3800, lines
2, 23, and 32, in Worksheet 5, column (a).
Enter "Form 3800, line" followed by the
appropriate line number (2, 23, or 32) in
the “From Form” column. Separate the
credits by activity and by type before
making entries in the worksheet. For
example, a corporation has a distilled
spirits credit from each of two passive
activities. Enter each distilled spirits credit
on separate lines in Worksheet 5, column
(a). A corporation has a distilled spirits
credit and a disabled access credit from
the same passive activity. Enter the
distilled spirits credit and the disabled
access credit on separate lines in
Worksheet 5, column (a).
Cooperatives. A closely held
cooperative that is allocating part or all of
a general business credit to patrons will
need to enter the credits being allocated
on Worksheet 5 so that the passive
activity rules can be applied before any
part of the credit is allocated to patrons.
For this purpose, Form 3800 should be
completed using only credits that will not
be allocated to patrons. Credits that are
being allocated to patrons should be
picked up from the separate credit forms.

▶

recaptured credits (see Regulations
section 1.469-3(f)). Enter in Worksheet 5,
column (b), the prior year unallowed
credits from Worksheet 6, column (c),
located in the 2017 Instructions for Form
8810 (adjusted if required).
For rules about prior year unallowed
credits from former passive activities, see
section 469(f).

Line 7

If any of the following apply, enter -0- on
line 7 and do not complete Part I or Part II
of the Computation for Line 7 below.
• The corporation is a personal service
corporation with a loss or zero on Form
8810, line 1d.
• The corporation is a personal service
corporation with net passive income on
Form 8810, line 1d, and the corporation
has an overall loss from the entire
disposition of a passive activity that is
equal to or greater than the net income on
line 1d.
• The corporation is a closely held
corporation with a loss or zero on Form
8810, line 1d, and that amount is equal to
or greater than the net active income on
Form 8810, line 2.
• The corporation is a closely held
corporation with net income on Form
8810, line 3, and the corporation has an
overall loss from an entire disposition that
is equal to or greater than the net income
on line 3.

Column (b). In figuring this year's
passive activity credit, the corporation
must take into account any credits from
passive activities disallowed for prior
years and carried forward to this year
adjusted, if required, for items such as
-12-

Computation for Line 7
Part I. Tax Attributable to Net
Passive Income
A. Income tax before credits from Form
1120 (Schedule J, line 2) . . . . . .
B. Taxable income from Form
1120 . . . . . . . . . . . . .
C. Net passive income. See
instructions for line C . . . .
D. Subtract line C from line B. If
zero or less, enter -0- here and
on line E . . . . . . . . . . .
E. Tax attributable to line D. Figure the
tax on the line D amount as if it were
the corporation's only taxable
income . . . . . . . . . . . . . . . .
F. Tax attributable to net passive
income. Subtract line E from line A.
Closely held corporations that do not
have net active income and personal
service corporations enter the amount
here and on Form 8810, line 7 . . .

Part II. Tax Attributable to Net
Active Income
G. Enter amount from line E if Part I is
completed. Otherwise, enter income
tax before credits from Form 1120
(Schedule J, line 2) . . . . . . . . .
H. Taxable income from Form
1120 . . . . . . . . . . . . .
I. Net active income . . . . . .
J. Net passive income or loss.
See instructions for line
J . . . . . . . . . . . . . . .
K. Combine lines I and J. If less
than zero, enter as a negative
amount . . . . . . . . . . . .
L. Subtract line K from line H. If
zero or less, enter -0- here and
on line M . . . . . . . . . . .

Instructions for Form 8810 (2018)

Worksheet 6—Allowed and Unallowed Credits

Keep for Your Records

Use Worksheet 6 to allocate the allowed and unallowed credits for each activity.
Column (a). Enter the total credits from Worksheet 5, column (c).
Column (b). Divide each of the credits in column (a) by the total of all credits in column (a). The total of the ratios should equal 1.00.
Column (c). Multiply Form 8810, line 8, by the ratios in column (b) and enter the results in column (c). These are the unallowed credits for 2018.
Keep a record of these amounts, so the credits can be carried to the next year.

DRAFT AS OF
September 13, 2018
Column (d). Subtract column (c) from column (a). These are the allowed credits for 2018. The amounts in this column are generally reported on
Form 3800. See Reporting Allowed Credits on Tax Return below.

Name of Activity

Form To Be
Reported On

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

M. Tax attributable to line L. Figure the
tax on the line L amount as if it were
the corporation's only taxable
income . . . . . . . . . . . . . . . .
N. Subtract line M from line G. If zero or
less, enter -0- here and on line
P . . . . . . . . . . . . . . . . . . .
O. Enter the corporation's nonpassive
credits without regard to the tax
liability limitations . . . . . . . . . .
P. Tax attributable to net active income.
Subtract line O from line N . . . . .
Q. Tax attributable to net passive
income and net active income. Add
lines F and P. Enter the result here
and on Form 8810, line 7 . . . . . .

Computation for Line 7, Part I. This
part is used by personal service
corporations and closely held corporations
with net passive income.
Computation for Line 7, Part II. This
part is used by closely held corporations
that have net active income. See the
instructions for line 2, earlier, for the
definition of net active income. If the
corporation has both net passive income
and net active income, complete Part I
and Part II and enter the amount from line
Q on Form 8810, line 7.
Note. When using taxable income in the
computation for line 7, it is not necessary
to refigure items based on taxable income,
such as the contributions deduction,
Instructions for Form 8810 (2018)

(a) Credits

▶

(b) Ratio

(c) Unallowed
Credits

(d) Allowed Credits

1.00

dividends-received deduction, and the net
operating loss deduction.
See the instructions for the tax return
filed for information on how to figure tax.
Line C. Enter the net income, if any, from
Form 8810, line 1d. If the corporation has
an overall loss from the entire disposition
of a passive activity, the amount to enter
on line C is the net income from line 1d
reduced by the overall loss, but not below
zero. If the result is zero, skip the rest of
the Part I computation.
Line J. If the corporation has net passive
income, enter the amount from line C on
this line. If the corporation has a net loss
from Form 8810, line 1d, enter that
amount on line J as a negative amount.

Reporting Allowed Credits on
Tax Return
Form 3800. Include on the applicable line
(3, 24, or 33) of Form 3800 each passive
activity general business credit allowed
from Worksheet 6, column (d).
Cooperatives. A closely held
cooperative that is allocating part or all of
a general business credit to patrons will
show any allocation of the credit allowed
from Worksheet 6, column (d), on the
applicable lines of the separate credit
forms.

Credits From PTPs

Line 9

A credit from a passive activity held
through a PTP is allowed to the extent of
the tax attributable to net passive income
from that PTP. See Publicly Traded
Partnerships (PTPs), earlier, for the
definition of a PTP.

If the corporation has more than one
type of credit or has credits from more
than one activity, use Worksheet 6 to
figure how much of the credit on line 9 is
allowed for each activity. Keep a record of
the unallowed credit and the activity to
which it belongs to figure the credit
allowed next year.

Do not enter credits from PTPs on
Form 8810 or the worksheets. Instead,
use the following steps to figure the
allowed and unallowed credits from
passive activities held through PTPs.
1. Figure the tax attributable to net
passive income for each PTP with current
year passive activity credits or prior year
unallowed credits.
2. Use the smaller of the tax
attributable to net income from passive
activities of the PTP or the credit

If the corporation has one type of credit,
the amount on line 9 is the credit allowed
for the year. See Reporting Allowed
Credits on Tax Return below.

-13-

(including prior year unallowed credits)
from passive activities of the PTP as the
amount allowed. Report the allowed
credits on the form normally used and
keep a record of the unallowed credits to
be carried to the next year.

Part III. Election To
Increase Basis of Credit
Property

reduction) to the extent that the credit has
not previously been allowed because of
the passive credit limitations. The amount
of the unallowed credit that can then be
applied against tax is reduced by the
amount of the basis adjustment. Once the
election is made it is irrevocable.
No basis adjustment can be elected on
a partial disposition of the corporation's
interest in a passive activity or if the
disposition is not fully taxable. The amount
of any unallowed credit, however, may
remain available to offset the tax
attributable to net passive and net active
income.

subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records relating
to a form or its instructions must be
retained as long as their contents may
become material in the administration of
any Internal Revenue law. Generally, tax
returns and return information are
confidential, as required by section 6103.

DRAFT AS OF
September 13, 2018
Line 10

Check the box on this line if the
corporation elects to increase the basis of
credit property it used in a passive activity
or former passive activity by the unallowed
credit that reduced the property's basis.
The election is available for a fully
taxable disposition of an entire interest in
an activity for which a basis adjustment
was made as a result of placing in service
property for which a credit was taken. The
corporation can elect to increase the basis
of the credit property immediately before
the disposition (by an amount no greater
than the amount of the original basis

Paperwork Reduction Act Notice. We
ask for the information on this form to carry
out the Internal Revenue laws of the
United States. You are required to give us
the information. We need it to ensure that
you are complying with these laws and to
allow us to figure and collect the right
amount of tax.

The time needed to complete and file
this form will vary depending on individual
circumstances. The estimated burden for
business taxpayers filing this form is
approved under OMB control number
1545-0123 and is included in the
estimates shown in the instructions for
their business income tax return.

If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler,
we would be happy to hear from you. See
the instructions for the tax return with
which this form is filed.

You are not required to provide the
information requested on a form that is

-14-

Instructions for Form 8810 (2018)