us internal revenue service: i8810--1998

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1998 Department of the TreasuryInternal Revenue ServiceInstructions for Form 8810Corporate Passive Activity Loss and Credit LimitationsSection references are to the Internal Revenue Code unless otherwise noted.

Paperwork Reduction Act Notice. Weask for the information on this form tocarry out the Internal Revenue laws of theUnited States. You are required to giveus the information. We need it to ensurethat you are complying with these lawsand to allow us to figure and collect theright amount of tax.

You are not required to provide theinformation requested on a form that issubject to the Paperwork Reduction Actunless the form displays a valid OMBcontrol number. Books or records relatingto a form or its instructions must beretained as long as their contents maybecome material in the administration of

any Internal Revenue law. Generally, taxreturns and return information areconfidential, as required by section 6103.

The time needed to complete and filethis form will vary depending on individualcircumstances. The estimated averagetime is:

If you have comments concerning theaccuracy of these time estimates or

suggestions for making this form simpler,we would be happy to hear from you. Seethe instructions for the tax return withwhich this form is filed.

A Change To NoteA partner in an electing large partnershipmust separately account for its distributiveshare of the partnership taxable incomeor loss from a passive loss limitationactivity. If the corporation is a limitedpartner, the corporation's income or lossis treated as an item of income or lossfrom a single activity. See section 772 fordetails.

General Instructions

Purpose of FormForm 8810 is used by personal servicecorporations and closely heldcorporations to figure the amount of anypassive activity loss or credit for thecurrent tax year and the amount of lossesand credits from passive activities allowed

on the corporation's tax return. It is alsoused to make the election to increase thebasis of credit property when thecorporation disposes of its interest in anactivity for which it has an unused credit.

Generally, passive activities includetrade or business activities in which thecorporation did not materially participatefor the tax year, and rental activitiesregardless of its participation.

Who Must FilePersonal service corporations and closelyheld corporations that have losses orcredits from passive activities must file

Form 8810.A personal service corporation has apassive activity loss for the year if the totallosses (including prior year unallowedlosses) from its passive activities exceedthe total income from its passive activities.A closely held corporation has a passiveactivity loss for the year if the total losses(including prior year unallowed losses)from all its passive activities exceed thesum of the total income from all itspassive activities and its net activeincome.

A personal service corporation has apassive activity credit for the year if itscredits from passive activities (including

prior year unallowed credits) exceed thetax attributable to net passive income. Aclosely held corporation has a passiveactivity credit for the year if its credits frompassive activities (including prior yearunallowed credits) exceed the sum of thetax attributable to net passive income andthe tax attributable to net active income.

For more information, get Pub. 925,Passive Activity and At-Risk Rules.

DefinitionsExcept as otherwise indicated, thefollowing terms are defined as shownbelow.

Personal Service CorporationA personal service corporation is acorporation whose principal activity for thetesting period (defined below) for the taxyear is the performance of personalservices. The services must besubstantially performed byemployee-owners. Employee-ownersmust own more than 10% of the fairmarket value of the corporation'soutstanding stock on the last day of thetesting period.

Testing period. Generally, the testingperiod for a tax year is the prior tax year.The testing period for a new corporationstarts with the first day of its first tax yearand ends on the earlier of:q The last day of its first tax year, orq The last day of the calendar year inwhich the first tax year began.Principal activity. The principal activityof a corporation is considered to be theperformance of personal services if,during the testing period, the corporation'scompensation costs for the performanceof personal services are more than 50%of its total compensation costs.Performance of personal services.Personal services are those performed inthe health, law, engineering, architecture,accounting, actuarial science, performingarts, or consulting fields (as defined inTemporary Regulations section1.448-1T(e)). The term performance ofpersonal services includes any activityinvolving the performance of personalservices in these areas.Substantial performance byemployee-owners. Personal servicesare substantially performed byemployee-owners if, for the testing period,more than 20% of the corporation'scompensation costs for the performanceof personal services are for servicesperformed by employee-owners.Employee-owner. A person isconsidered to be an employee-owner ifthe person is an employee of thecorporation on any day of the testingperiod, and owns any outstanding stockof the corporation on any day of thetesting period. Stock ownership isdetermined under the attribution rules ofsection 318, except that any issubstituted for 50% in section318(a)(2)(C).

For more information about personalservice corporations, see TemporaryRegulations section 1.441-4T.

Closely Held CorporationA corporation is a closely heldcorporation if at any time during the lasthalf of the tax year more than 50% invalue of its outstanding stock is owned,directly or indirectly, by or for not morethan five individuals, and the corporationis not a personal service corporation.

Certain organizations are treated asindividuals for this test. (See section542(a).) For rules of determining stockownership, see section 544 (as modifiedby section 465(a)(3)).

Recordkeeping ............. ... 26 hr., 19 min.

Learning about the lawor the form ...................... 5 hr., 34 min.

Preparing and sendingthe form to the IRS......... 6 hr., 14 min.

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Other Passive Activity Terms

Net income is the excess of current yearincome over current year deductions fromthe activity. This includes any current yeargains or losses from the disposition ofassets or an interest in the activity.Net loss is the excess of current yeardeductions over current year income fromthe activity. This includes any current yeargains or losses from the disposition ofassets or an interest in the activity.

Overall gain is the excess of the netincome from the activity over the prioryear unallowed losses from the activity.Overall loss is the excess of the prioryear unallowed losses from the activityover the net income from the activity orthe prior year unallowed losses from theactivity plus the net loss from the activity.Prior year unallowed losses are thedeductions and losses from an activitythat were disallowed under the passiveactivity loss limitations in a prior year andcarried forward to this tax year undersection 469(b). See Regulations section1.469-1(f)(4).

Coordination WithOther LimitationsLosses from passive activities generallyare subject to other limitations (e.g., basis,section 163(j) interest deductionlimitations, and at-risk limitations) beforethey are subject to the passive losslimitations. Once a loss becomesallowable under these other limitations,the corporation must determine whetherthe loss is limited under the passive lossrules. See Form 6198, At-RiskLimitations, for details on the at-risk rules.Capital losses that are allowable underthe passive loss rules, however, may belimited under section 1211(a). Similarly,percentage depletion deductions that areallowable under the passive loss rulesmay be limited under section 613A(d).

Special Rules forConsolidated GroupThe passive activity loss and passiveactivity credit of an affiliated group ofcorporations filing a consolidated returnfor the tax year (a consolidated group) aredetermined by taking into account thefollowing items of each member of thegroup.q Passive activity gross income anddeductions.q Gain or loss on dispositions.q Net active income (for a consolidatedgroup treated as a closely heldcorporation).q Credits from passive activities.

Activities That AreNot Passive ActivitiesThe following are not passive activities:

1.Trade or business activities inwhich the corporation materiallyparticipated for the tax year.

2. Any rental real estate activity inwhich the corporation materiallyparticipated if the corporation was aclosely held corporation that derived morethan 50% of its gross receipts from realproperty trades or businesses in which itmaterially participated.

For purposes of this rule, each interestis a separate activity, unless thecorporation elects to treat all interests inrental real estate as one activity. Thecorporation makes the election by

attaching a statement to its originalincome tax return for the tax year. SeeRegulations section 1.469-9(g) for detailson how to make or revoke this election.

The term real property trade orbusiness is any real propertydevelopment, redevelopment,construction, reconstruction, acquisition,conversion, rental, operation,management, leasing, or brokerage tradeor business.Note: If an activity qualifies for theexception described under item2, above,in 1998, but has a prior year unallowedloss, the prior year unallowed loss istreated as a loss from a former passive

activity. SeeFormer Passive Activitieson page 5.

3.A working interest in an oil orgas well. The working interest must beheld directly or through an entity that doesnot limit the corporation's liability (such asa general partner interest in apartnership). In this case, it does notmatter whether the corporation materiallyparticipated in the activity for the tax year.

If, however, the corporation's liabilitywas limited for part of the year (e.g., thecorporation converted its general partnerinterest to a limited partner interest duringthe year), some of the corporation'sincome and losses from the working

interest may be treated as passive activitygross income and passive activitydeductions. See Temporary Regulationssection 1.469-1T(e)(4)(ii).

4. An activity of trading personalproperty for the account of owners ofinterests in the activity. See TemporaryRegulations section 1.469-1T(e)(6).

Generally, income, losses, and creditsfrom these activities should not beentered on Form 8810. However, lossesand credits from these activities may besubject to limitations other than thepassive loss and credit rules.

Rental ActivitiesExcept for a rental real estate activity thatmeets the requirements described underitem 2 in Activities That Are NotPassive Activities above, a rental activityis a passive activity even if the corporationmaterially participated in the activity.

An activity is a rental activity if tangibleproperty (real or personal) is used bycustomers or held for customer use. Thegross income (or expected gross income)from the activity must represent amountspaid (or to be paid) mainly for the use ofthe property. It does not matter whether

the use of the property is under a lease,a service contract, or some otherarrangement.

However, if the corporation meets anyone of the five exceptions listed below,the rental of the property is not treated asa rental activity. See Reporting Income,Deductions, Losses, and Credits Fromthe Activities on page 3 if the corporationmeets any of the exceptions.

Exceptions

An activity is not a rental activity if:1.The average period of customer

use (defined below) of the rental propertyis:

a. 7 days or less, orb. 30 days or less and significant

personal services (defined below) wereprovided in making the rental propertyavailable for customer use.

Figure the average period ofcustomer use for a class of property bydividing the total number of days in allrental periods by the number of rentalsduring the tax year. If the activity involvesrenting more than one class of property,multiply the average period of customeruse of each class by the ratio of the grossrental income from that class to theactivity's total gross rental income. Theactivity's average period of customer useequals the sum of these class-by-classaverage periods weighted by grossincome. See Regulations section1.469-1(e)(3)(iii).

Significant personal services includeonly services performed by individuals. Indetermining if personal services aresignificant, all the relevant facts andcircumstances are taken intoconsideration. Facts and circumstancesinclude the frequency of the services, thetype and amount of labor required toperform the services, and the value of theservices relative to the amount chargedfor the property's use.

Significant personal services do notinclude excluded services. SeeTemporary Regulations section1.469-1T(e)(3)(iv)(B).

2. Extraordinary personal serviceswere provided in connection with makingthe rental property available for customeruse.

Services provided in connection withmaking rental property available forcustomer use are extraordinarypersonal services only if the services areperformed by individuals and thecustomers' use of the rental property isincidental to their receipt of the service.

3. The rental of the property isincidental to a nonrental activity.

The rental of property is incidental toan activity of holding property forinvestment if the main purpose for holdingthe property is to realize a gain from theappreciation of the property and the grossrental income is less than 2% of thesmaller of the unadjusted basis of theproperty or the fair market value of theproperty.

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The rental of property is incidental to atrade or business activity if:

a. The corporation owned an interestin the trade or business activity during theyear;

b. The rental property was mainlyused in the trade or business activityduring the tax year or during at least 2 ofthe 5 preceding tax years; and

c. The gross rental income from theproperty is less than 2% of the smaller ofthe unadjusted basis of the property or the

fair market value of the property.Lodging provided for the employer's

convenience to an employee or theemployee's spouse or dependents isincidental to the activity or activities inwhich the employee performs services.

Unadjusted basis means the cost ofthe property without regard todepreciation deductions or any otherbasis adjustment described in section1016.

4. The corporation customarily makesthe rental property available duringdefined business hours for nonexclusiveuse by various customers.

5. The corporation provides propertyfor use in a nonrental activity of apartnership or joint venture in its capacityas an owner of an interest in suchpartnership or joint venture.

Example: If a partner contributes theuse of property to a partnership, none ofthe partner's distributive share ofpartnership income is income from arental activity unless the partnership isengaged in a rental activity. In addition, apartner's gross income attributable to aguaranteed payment under section 707(c)is not income from a rental activity. Thedetermination of whether the propertyused in the activity is provided in thepartner's capacity as an owner of aninterest in the partnership is made on thebasis of all the facts and circumstances.

Reporting Income,Deductions, Losses, andCredits From the Activities

If the corporation meets any of the fiveexceptions listed above, the corporation'srental of the property is not a rentalactivity. The corporation then mustdetermine:

1. Whether the rental of the propertyis a trade or business activity and, if so,

2. Whether the corporation materiallyparticipated or significantly participated in

the activity for the tax year. (See Tradeor Business Activities and Material orSignificant Participation below.)To report income, deductions, losses, orcredits from a trade or business activity inwhich the corporation did not materiallyparticipate, see Trade or businessactivities without material participationbelow.

If the corporation meets any of the fiveexceptions listed above and the activity isa trade or business activity in which thecorporation materially participated, report

any income, deduction, loss, or creditfrom the activity on the forms orschedules normally used.

If the corporation did not meet any ofthe five exceptions, the rental activity isgenerally a passive activity. Special rulesapply if the corporation conducted therental activity through a publicly tradedpartnership (PTP) or if any of the rulesdescribed in Recharacterization ofPassive Income on page 5 apply. SeePublicly Traded Partnerships (PTPs)

on page 10.If none of the special rules apply, use

Worksheets 1 and 2 on page 7 todetermine the amount to enter in Part Iof Form 8810 for each passive rentalactivity. If the corporation has credits frompassive rental activities, use Worksheet 5on page 11 to figure the amount to enterin Part II of Form 8810.

Trade or Business ActivitiesA trade or business activity is an activity(other than a rental activity or an activitytreated as incidental to an activity ofholding property for investment) that:

1. Involves the conduct of a trade orbusiness (within the meaning of section162),

2. Is conducted in anticipation ofstarting a trade or business, or

3. Involves research or experimentalexpenditures deductible under section174 (or that would be if the corporationchose to deduct rather than capitalizethem).

Reporting Income,Deductions, Losses, andCredits From the Activities

Trade or business activities withmaterial participation. If the corporation

materially participated in a trade orbusiness activity, the activity is not apassive activity. Report the income,deductions, losses, and credits from theactivity on the form or schedule normallyused.Trade or business activities withoutmaterial participation. In general, useWorksheets 1 and 2 on page 7 todetermine the amount to enter in Part Iof Form 8810 for each trade or businessactivity in which the corporation did notmaterially participate. If, however, thecorporation held the activity through aPTP or the activity is a significantparticipation activity, special rules apply.

See Publicly Traded Partnerships(PTPs) on page 10. See Pub. 925 for howto report income or losses from significantparticipation passive activities.

In general, if the corporation has creditsfrom passive activities, use Worksheet 5on page 11 to figure the amount to enterin Part II of Form 8810. However, if thecorporation held the activity through aPTP, special rules apply. See CreditsFrom PTPs on page 12 for how to reportcredits from these activities.

Material orSignificant ParticipationPersonal service corporations and closelyheld corporations materially orsignificantly participate in an activity if oneor more individuals, each of whom wouldmaterially or significantly participate in theactivity if the corporation's activity werethe individual's activity, directly orindirectly own more than 50% (by value)of the corporation's outstanding stock.

For this purpose, an individual'sparticipation in all activities other thanactivities of the corporation isdisregarded.

A closely held corporation alsomaterially participates in an activity if thecorporation satisfies the qualifyingbusiness requirements of section465(c)(7)(C) (without regard to (iv) for theexcluded business exception from theat-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 leastone full-time employee of the corporationwere in the active management of theactivity;

2. During the same period,substantially all the services of at leastthree full-time nonowner employees weredirectly related to the activity; and

3. The deductions attributable to theactivity and allowed solely under sections162 and 404 exceed 15% of the grossincome from the activity for the tax year.Participation. For purposes of thematerial participation tests listed below,participation generally includes any workthe individual did (without regard to thecapacity in which the individual did it) inconnection with an activity in which thecorporation owned an interest at the timethe individual did the work.

Work is not treated as participation,however, if the work is not work that anowner of that type of activity wouldcustomarily do, and if one of theindividual's main reasons for doing thework is to avoid the disallowance oflosses or credits from the activity underthe passive loss and credit rules.Tests for investors. The work theindividual did as an investor in an activityis not treated as participation unless theindividual was directly involved in theday-to-day management or operations of

the activity. Work done as an investorincludes:1. Studying and reviewing financial

statements or reports on operations of theactivity.

2. Preparing or compiling summariesor analyses of the finances or operationsof the activity for the individual's own use.

3. Monitoring the finances oroperations of the activity in anonmanagerial capacity.

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If the individual is married for the taxyear, the individual's participation in anactivity includes any participation in theactivity during the tax year by thatindividual's spouse, whether or not thespouse owned any interest in the activityand whether or not the individual andspouse file a joint return for the tax year.Tests for individuals. An individualwould materially participate in an activityof the corporation if one or more of thefollowing tests are satisfied.

1. The individual participated in theactivity for more than 500 hours.

2. The individual's participation in theactivity for the tax year was substantiallyall of the participation in the activity of allindividuals (including individuals who didnot own any interest in the corporation orthe activity) for the year.

3. The individual participated in theactivity for more than 100 hours during thetax year, and that individual participatedat least as much as any other individual(including individuals who did not own anyinterest in the corporation or the activity)for the year.

4. The activity is a significantparticipation activity for the individual forthe tax year, and the individual's totalparticipation in all significant participationactivities during the year exceeded 500hours. A significant participationactivity is any trade or business activityin which the individual participated formore than 100 hours during the year andin which the individual did not materiallyparticipate under any of the materialparticipation tests (other than this test 4).

For this purpose, an individual'sparticipation in all activities other thanactivities of the corporation isdisregarded.

5. The individual materiallyparticipated in the activity for any 5(whether or not consecutive) of the 10preceding tax years.

6. The activity is a personal serviceactivity in which the individual materiallyparticipated for any 3 (whether or notconsecutive) preceding tax years.

An activity is a personal service activityif it involves the performance of personalservices in the fields of health, law,engineering, architecture, accounting,actuarial science, performing arts,consulting, or any other trade or businessin which capital is not a materialincome-producing factor.

7. Based on all the facts andcircumstances, the individual participatedin the activity on a regular, continuous,and substantial basis during the tax year.

The individual did not materiallyparticipate in the activity under thisseventh test, however, if the individualparticipated in the activity for 100 hoursor less during the year. Participation inmanaging the activity does not count indetermining whether the individualmaterially participated under the test if:

a. Any person (except that individual)received compensation for performing

services in the management of theactivity; or

b. Any person in the activity spentmore hours during the tax year than thatindividual spent performing services in themanagement of the activity (regardless ofwhether the individual was compensatedfor the management services).

Proof of participation. Participation inan activity can be proved by anyreasonable means. Contemporaneousdaily time reports, logs, or similar

documents are not required if participationcan be established by other reasonablemeans. Reasonable means for thispurpose may include, but are not limitedto, the identification of services performedover a period of time and the approximatenumber of hours spent performing theservices during that period, based onappointment books, calendars, ornarrative summaries.Special rules for limited partners.Generally, a limited partner cannotmaterially participate in an activity.However, the corporation is considered tomaterially participate in an activity inwhich it holds a limited partner interest if

one or more individuals, each of whomwould materially participate in the activityunder test 1, 5, or 6 for the tax year if thecorporation's activity were the individual'sactivity, directly or indirectly, own morethan 50% (by value) of the corporation'soutstanding stock.

The corporation is not treated as alimited partner, however, if the corporationwas a general partner in the partnershipat all times during the partnership's taxyear ending with or within thecorporation's tax year (or, if shorter,during the portion of the partnership's taxyear in which the corporation directly orindirectly owned a limited partner

interest).Consolidated groups. See Regulationssection 1.469-1(h)(4) for rules fordetermining whether a consolidated groupmaterially or significantly participates.

Grouping theCorporation's ActivitiesGenerally, one or more trade or businessactivities or rental activities may betreated as a single activity if the activitiesmake up an appropriate economic unit forthe measurement of gain or loss underthe passive activity rules. Whetheractivities make up an appropriate

economic unit depends on all the relevantfacts and circumstances. The factorsgiven the greatest weight in determiningwhether activities make up an appropriateeconomic unit are:

1. Similarities and differences in typesof trades or businesses,

2. The extent of common control,3. The extent of common ownership,4. Geographical location, and5. Reliance between or among the

activities.

Example. The corporation has asignificant ownership interest in a bakeryand a movie theater in Baltimore and ina bakery and a movie theater inPhiladelphia. Depending on all therelevant facts and circumstances, theremay be more than one reasonablemethod for grouping the corporation'sactivities. For instance, the followinggroupings may or may not be permissible:a single activity, a movie theater activityand a bakery activity, a Baltimore activity

and a Philadelphia activity, or fourseparate activities.Once the corporation chooses a

grouping under these rules, it mustcontinue using that grouping in later taxyears unless a material change in thefacts and circumstances makes it clearlyinappropriate.

The IRS may regroup the corporation'sactivities if the grouping fails to reflect oneor more appropriate economic units andone of the primary purposes of thegrouping is to avoid the passive activitylimitations.Limitation on grouping certainactivities. The following activities may

not be grouped together.1. A rental activity with a trade or

business activity unless the activitiesbeing grouped together make up anappropriate economic unit, and

a. The rental activity is insubstantialrelative to the trade or business activityor vice versa, or

b. Each owner of the trade orbusiness activity has the sameproportionate ownership interest in therental activity. If so, the portion of therental activity involving the rental ofproperty to be used in the trade orbusiness activity may be grouped with thetrade or business activity.

2. An activity involving the rental ofreal property with an activity involving therental of personal property (except forpersonal property provided in connectionwith the real property or vice versa).

3. Any activity with another activity ina different type of business and in whichthe corporation holds an interest as alimited partner or as a limitedentrepreneur (as defined in section464(e)(2)) if that other activity engages inholding, producing, or distributing motionpicture films or videotapes; farming;leasing section 1245 property; orexploring for (or exploiting) oil and gasresources or geothermal deposits.

Activities conducted throughpartnerships and other C corporationssubject to section 469. Once apartnership or corporation determines itsactivities under these rules, a partner orshareholder may use these rules to groupthose activities with each other, withactivities conducted directly by the partneror shareholder, and with activitiesconducted through other partnerships andcorporations. A partner or shareholdermay not treat as separate activities those

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activities grouped together by thepartnership or corporation.Partial disposition of an activity. Thecorporation may treat the disposition ofsubstantially all of an activity as aseparate activity if it can prove withreasonable certainty:

1. The prior year unallowed losses, ifany, allocable to the part of the activitydisposed of, and

2. The net income or loss for the yearof disposition allocable to the part of the

activity disposed of.

Passive ActivityIncome and DeductionsTake into account only passive activityincome and passive activity deductions indetermining the corporation's overall gainor overall loss from all passive activitiesor any passive activity. To figure itspassive activity loss, a closely heldcorporation subtracts both passive activityincome and net active income from itspassive activity deductions. See theinstructions for line 2 on page 8 for thedefinition of net active income.

Passive Activity Income

Passive activity income includes allincome from passive activities, including(with certain exceptions described inTemporary Regulations section1.469-2T(c)(2) and Regulations section1.469-2(c)(2)) gain from the disposition ofan interest in a passive activity or propertyused in a passive activity at the time ofthe disposition.

Passive activity income does notinclude the following items:q Income from an activity that is not apassive activity.q Portfolio income, including interest,dividends, annuities, and royalties notderived in the ordinary course of a tradeor business, and gain or loss from thedisposition of property that producesthose types of income or is held forinvestment. See Temporary Regulationssection 1.469-2T(c)(3).q Personal service income, includingcommissions and income from trade orbusiness activities in which thecorporation materially participated for thetax year. See Temporary Regulationssection 1.469-2T(c)(4).q Income from positive section 481adjustments allocated to activities otherthan passive activities. See TemporaryRegulations section 1.469-2T(c)(5).q Income or gain from investments ofworking capital in an activity.q Income from an oil or gas property if thecorporation treated any loss from aworking interest in the property for any taxyear beginning after 1986 as anonpassive loss under the rule excludingworking interests in oil and gas wells frompassive activities. See Regulationssection 1.469-2(c)(6).

q Income treated as income that is notpassive activity income under TemporaryRegulations section 1.469-2T(f) andRegulations section 1.469-2(f). SeeRecharacterization of Passive Incomebelow.q Overall gain from any interest in apublicly traded partnership.q State, local, and foreign income taxrefunds.q Any reimbursement of a casualty ortheft loss included in income to recover

all or part of a prior year loss deduction,if the deduction for the loss was nottreated as a passive activity deduction.q Cancellation of debt income to theextent that, at the time the debt isdischarged, the debt is not properlyallocable under Temporary Regulationssection 1.163-8T to passive activities.

Passive Activity Deductions

Passive activity deductions include alldeductions from activities that are passiveactivities for the tax year and alldeductions from passive activities thatwere disallowed under the passive lossrules in prior tax years and carried forward

to the tax year under section 469(b). SeeRegulations section 1.469-1(f)(4).

Passive activity deductions also includelosses from dispositions of property usedin a passive activity at the time of thedisposition and losses from a dispositionof less than an entire interest in a passiveactivity. See Dispositions on page 6 forthe treatment of losses on certaindispositions of an entire interest in anactivity.

Passive activity deductions do notinclude the following items:q Deductions for expenses (other thaninterest expense) that are clearly anddirectly allocable to portfolio income.q Dividends-received deductions fordividends not included in passive activitygross income.q Interest expense, other than interestexpense properly allocable underTemporary Regulations section 1.163-8Tto passive activities. For example,capitalized interest expense is not apassive activity deduction.q Losses from dispositions of propertythat produce portfolio income or propertyheld for investment.q State, local, and foreign income taxes.q Charitable contribution deductions.q Net operating loss deductions,

percentage depletion carryovers undersection 613A(d), and capital losscarrybacks and carryovers.q Deductions and losses that would havebeen allowed for tax years beginningbefore 1987, but for basis or at-risklimitations.q Net negative section 481 adjustmentsallocated to activities other than passiveactivities. See Temporary Regulationssection 1.469-2T(d)(7).

q Deductions for losses from fire, storm,shipwreck or other casualty, or from theft,if losses similar in cause and severity donot recur regularly in the activity.

Recharacterization ofPassive Income

Certain income from passive activitiesmay be recharacterized and excludedfrom passive activity income. The amountof income recharacterized equals the netincome from the sources described

below. If during the tax year thecorporation received net income from anyof these sources (either directly or througha partnership), see Pub. 925 for detailson reporting net income or loss from thesesources. Also see Temporary Regulationssection 1.469-2T(f) and Regulationssection 1.469-2(f) for more information.

Income from the following sources maybe subject to the net incomerecharacterization rules.q Significant participation passiveactivities. A significant participationpassive activity is any trade or businessactivity (defined on page 4) in which thecorporation is treated as having

participated for more than 100 hoursduring the tax year but did not materiallyparticipate.q Rental of property when less than 30%of the unadjusted basis of the property issubject to depreciation.q Equity-financed lending activities.q Rental of property incidental to adevelopment activity.q Rental of property to a nonpassiveactivity.q Acquisition of an interest in apass-through entity that licensesintangible property.

Former Passive ActivitiesA former passive activity is any activitythat was a passive activity in a prior taxyear, but is not a passive activity in thecurrent tax year. A prior year unallowedloss from a former passive activity isallowed to the extent of the current yearincome from the activity.If the current year net income from theactivity is less than the prior yearunallowed loss, enter the prior yearunallowed loss and any current year netincome from the activity on Form 8810and the applicable worksheets.If the current year net income from theactivity is equal to or greater than theprior year unallowed loss from theactivity, report the income and loss onthe forms and schedules normally used;do not enter the amounts on Form 8810.If the activity has a net loss for thecurrent year, enter the prior yearunallowed loss (but not the current yearloss) on Form 8810 and the applicableworksheets.

To report a disposition of a formerpassive activity, follow the rules underDispositions on page 6.

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Dispositions

Disposition of LessThan an Entire Interest

Gains and losses from the disposition ofless than an entire interest in an activityare treated as part of the overall gain orloss from the activity for the current year.A disposition of less than an entireinterest does not trigger the allowance ofprior year unallowed losses.

Disposition of an Entire InterestIf the corporation disposed of its entireinterest in a passive activity or a formerpassive activity to an unrelated party in afully taxable transaction during the taxyear, the losses allocable to the activityfor the year are not limited by the passiveactivity loss rules. A fully taxabletransaction is a transaction in which all therealized gain or loss is recognized.

If the corporation is using theinstallment method to report this kind ofdisposition, to figure the loss for thecurrent year that is not limited by thepassive loss rules, multiply the

corporation's overall loss (which does notinclude losses allowed in prior years) bythe following fraction:

Unallowed passive activity credits,unlike unallowed passive activity losses,are not allowable when the corporationdisposes of its interest in an activity.However, the corporation may elect toincrease the basis of the credit propertyby the amount of the original basisreduction of the property to the extent thatthe credit has not been allowed under thepassive activity rules. Unallowed passiveactivity credits that are not used toincrease the basis of the credit property

are carried forward until they are allowed.To make the election, complete Part III ofForm 8810. No basis adjustment may beelected on a partial disposition of thecorporation's interest in a passive activity.

A partner in a publicly tradedpartnership (PTP) is not treated as havingdisposed of an entire interest in an activityof a PTP until there is an entire dispositionof the partner's interest in the PTP.

Reporting an Entire Disposition onSchedule D or Form 4797

When the corporation completelydisposes of an entire interest in a passiveactivity or a former passive activity, there

may be net income or loss and prior yearunallowed losses from the activity. All theincome, gains, deductions, and losses arereported on the forms and schedulesnormally used.

Combine the income, gains,deductions, and losses (including prioryear unallowed losses) from the activityfor the tax year to see if the corporationhas an overall gain or loss.If the corporation has an overall gainfrom a passive activity and also has otherpassive activities to report on Form 8810,include the income, gains, deductions,and losses (including prior year unallowedlosses) on Worksheet 1 on page 7. If thisis the corporation's only passive activity

or a former passive activity, report theincome, gains, deductions, and losses(including prior year unallowed losses) onthe forms and schedules normally used,but do not enter them on the worksheetsor on Form 8810.If the corporation has an overall losswhen combining the income, gains,deductions, and losses (including prioryear unallowed losses) from the activity,report all of the income, gains,deductions, and losses on the forms andschedules normally used, but do not enterthem on the worksheets or on Form 8810.

Note: Members of a consolidated group,see Temporary Regulations section

1.469-1T(h)(6), (7), and (8) for rules onapplying the passive loss rules todispositions of property and otherintercompany transactions.Gain recognized in the current year

Unrecognized gain as of the beginningof the current year

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Worksheet 1Computation of Income, Gains, Deductions, and Lossesfor Worksheet 2

Name of activity:Name of activity:

1. Gross receipts

2. Schedule D gains

3. Form 4797 gains

4. Other passive income

Total income. Add lines 1

through 4. Enter the resulthere and in column (a) ofWorksheet 2

Deductions:

Cost of goods solda.

Compensation of officersb.

Salaries and wagesc.

d. Repairs and maintenance

Bad debtse.

Rentsf.

Taxes and licensesg.

Interesth.

Depreciationi.

Depletionj.

Advertisingk.

Other deductionsl.

Total deductions. Add

lines 6a through 6l

8. Schedule D losses

9. Form 4797 losses

Total deductions and

losses. Add lines 7 through 9.

Enter the result here and in

column (b) of Worksheet 2

5.

6.

7.

10.

Specific InstructionsNote: Complete Worksheets 1 and 2before completing Part I of Form 8810.

Worksheet 1Worksheet 1 is used to figure the totalcurrent year income, gains, deductions,and losses for each passive activity.

Worksheet 2 Columns (a) and (b). Enter in column (a) the total income for the current year shown on line 5 in Worksheet 1 above. Enter incolumn (b) the total deductions and losses shown on line 10 in Worksheet 1.

Worksheet 2 for Form 8810, Lines 1a, 1b, and 1c

Overall gain or lossPrior yearCurrent year

Name of activity (a) Income (c) Unallowed(d) Gain (e) Loss

Totals. Enter on lines 1a, 1b, and 1c ofForm 8810

(b) Deductions and

(line 1a) losses (line 1b) losses (line 1c)

Lines 1 through 4. Enter on theselines the gross receipts and other

income from passive activities andpassive activity gains reported on Form4797 and Schedule D.

Line 5. Enter total income on this lineand in column (a) of Worksheet 2.

Lines 6a through 6l. Enter passiveactivity deductions.

Lines 8 and 9. Enter passive activitylosses reported on Schedule D andForm 4797.

Line 10. Enter total deductions andlosses on this line and in column (b) ofWorksheet 2.

Column (c). Enter the prior year unallowed losses that can be found in Worksheet 4, column (c) of the 1997 Form 8810instructions.

Totals. The total from columns (a), (b), and (c) of Worksheet 2 are entered on lines 1a, 1b, and 1c of Form 8810.

Columns (d) and (e). Combine income, deductions, and losses in columns (a) through (c) for each activity. Enter any overallgain in column (d) or any overall loss in column (e). Do not enter the amounts in columns (d) and (e) on Form 8810. Theseamounts will be used when Form 8810 is completed to figure the loss allowed for the current year.

Gross receipts, gains from the sale of

business assets, capital gains, and otherpassive income should also be enteredon the forms and schedules normallyused. Allowable passive activitydeductions and losses are entered onthe forms and schedules after Form8810 is completed and the deductionsand losses are allocated to the activities.

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Part I1998Passive Activity LossLines 1d and 3. If line 1d or 3 shows netincome or zero, all the deductions andlosses are allowed including any prioryear unallowed losses entered on line 1c.Enter the deductions on the appropriatelines of Form 1120 and any losses fromForm 4797 or Schedule D (Form 1120)on that form or schedule, 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 beenreported on page 1 of Form 1120 insteadof on Form 4797 or Schedule D, includethe prior year unallowed losses on theappropriate line along with any currentyear deduction or loss from that line.Example. The corporation had $1,000of deductions for current year repairs andmaintenance and $500 of deductions forprior year unallowed repairs andmaintenance. Enter $1,500 as thededuction for repairs and maintenanceallowed from passive activities on theproper line.

Line 2Closely held corporations.Closely held corporations can offset theloss, if any, on line 1d with net activeincome. Net active income is thecorporation's taxable income for the tax

year, determined without regard to thefollowing items:q Net passive income or loss.q Portfolio income. See Passive ActivityIncome on page 5.q Deductions attributable to portfolioincome described in TemporaryRegulations section 1.469-2T(d)(2)(i), (ii),and (iv).q Interest expense allocated underTemporary Regulations section 1.163-8Tto a portfolio expenditure (within themeaning of Temporary Regulationssection 1.163-8T(b)(6)).q Gain on the disposition of substantiallyappreciated property formerly held forinvestment. See Regulations section1.469-2(c)(2)(iii)(F).q Gross income from certain oil or gasproperties treated under Regulationssection 1.469-2(c)(6) as not from apassive activity.q Gross income and deductions from anytrade or business activity of trading certainpersonal property described in TemporaryRegulations section 1.469-1T(e)(6), butonly if the corporation did not materially

participate in the activity for the tax year.If the corporation disposed of itsentire interest in a passive activity to anunrelated party in a fully taxabletransaction, figure net active income by

taking into account an overall loss fromthat activity only to the extent it exceedsoverall gain from all other passiveactivities (the gain, if any, shown on line1d of Form 8810).

If there is an overall loss from all otherpassive activities (line 1d of Form 8810 isa loss), figure net active income by takinginto account all of the overall loss fromthat activity.Line 4Total deductions and lossesallowed.q Worksheet 2. Columns (d) and (e) ofWorksheet 2, on page 7, show whetheran activity had an overall gain or loss.

1.Column (d). A corporation with anoverall gain in column (d) will report all ofthe deductions and losses listed inWorksheet 1 and any prior year unallowedlosses in Worksheet 2 for those activitieson the appropriate lines of Form 1120 andon Schedule D or Form 4797, ifapplicable.

2.Column (e). A corporation usesWorksheets 3 and 4 for activities thatshow an overall loss in column (e).q Worksheet 3, below, is used to figurethe unallowed deductions and losses tobe carried forward to Worksheet 4, onpage 9. Use Worksheet 4 to figure theallowed deductions and losses to reporton the forms and schedules for 1998.

Worksheet 3Allocation of Unallowed Deductions and Losses

(c) Unallowed deductionsand losses

(b) Ratio(a) Loss fromWorksheet 2 col. (e)

Name of activity

Totals 1.00

Worksheet 3 If the corporation has activities in Worksheet 2 with an overall loss in column (e), use Worksheet 3 to figure the unalloweddeductions and losses for each activity.

Column (a). Enter the loss from column (e) of Worksheet 2.

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 foreach of the activities in column (b). The total of all the ratios should equal 1.00.

Column (c). Multiply the unallowed loss from line 3 of Form 8810 by each of the ratios in column (b) and enter the results incolumn (c).

Use Worksheet 4 to figure the allowed deductions and losses.

If any of the activities in Worksheet 2 had an overall gain in column (d), all of the deductions and losses (including prior yearunallowed losses) for that activity are allowed in full. Enter the deductions on the appropriate line of Form 1120 and enter anylosses on Form 4797 or Schedule D, if applicable.

If there were prior year unallowed losses from 1997, include the prior year unallowed losses on the appropriate line alongwith any current year deduction or loss for that line. See the example in the instructions for lines 1d and 3 above. Prior yearunallowed losses from Form 4797 and Schedule D (Form 1120) should have been kept separate in 1997, and should beidentified as prior year unallowed losses on Form 4797 and Schedule D (Form 1120).

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Worksheet 4Use Worksheet 4 to allocate theunallowed deductions and losses for eachactivity among Form 1120 deductions andany losses to be reported on Form 4797and Schedule D.

If the unallowed loss is reported on oneform or schedule, skip the followingexample and complete Worksheet 4.

If the unallowed loss is from lossesreported on more than one form or

schedule, allocate the unallowed lossfrom column (c) of Worksheet 3 amongthe net losses as follows:Example. The corporation has onepassive activity. The activity has anunallowed loss of $18,000 in column (c)of Worksheet 3 and the following netlosses and net gain:

Add the net losses of $20,000 and$1,000, for a total of $21,000. Divide thenet loss reported on each form by the totalof the net losses, and multiply the resultby the unallowed loss of $18,000, asshown below:

Form 1120:$20,000$21,000

$18,000 = $17,143

Schedule D:$1,000

$21,000 $18,000 = $857

On Form 4797, report the $2,000 lossand the $5,000 gain. On Worksheet 4,enter the $17,143 of unalloweddeductions allocated to Form 1120 in

column (c) on the line for total Form 1120deductions. Enter the $857 of unallowedSchedule D losses in column (c) of line2. Worksheet 4 is used to allocate the$17,143 to the Form 1120 deductions andshow the allowed and unallowedSchedule D loss.Line 1, column (a). Enter the currentyear deductions for each Form 1120expense (lines 6a through 6l of Worksheet1) plus any prior year unallowed Form1120 deduction for that activity. Forexample, if line 6i of Worksheet 1 showscurrent year depreciation for the activityof $2,200, and the activity had prior yearunallowed depreciation of $1,200, enter

$3,400 on line 1i, column (a), ofWorksheet 4.Line 2, column (a). Enter any ScheduleD losses from line 8 of Worksheet 1 plusany prior year unallowed Schedule Dlosses for that activity.Line 3, column (a). Enter any Form 4797losses from line 9 of Worksheet 1 plusany prior year unallowed Form 4797losses for that activity.

Line 1, column (b). Divide each of theindividual Form 1120 deductions shownin column (a) by the total of all of the Form1120 deductions in column (a) and enterthe ratio for each of the deductions incolumn (b). The total of the ratios mustequal 1.00.Column (c). Allocate the portion of theloss in Worksheet 3, column (c), amongthe Form 1120 deductions by multiplyingthe unallowed loss attributable to the totalForm 1120 deductions by each of the

ratios in column (b). Enter the portion ofthe unallowed loss in Worksheet 3,column (c) that is attributable to aSchedule D or Form 4797 loss in column(c) of this worksheet.Column (d). Subtract column (c) fromcolumn (a) and enter the results in thiscolumn. Enter the deductions allowed forForm 1120 on the proper lines of Form1120 and enter the allowed Schedule Dand Form 4797 losses on that form orschedule.

Worksheet 4Allowed Deductions and Losses

(d) Alloweddeductions and

losses

(c) Unalloweddeductions and

losses

(a) Deductionsand losses

Name of activity: (b) Ratio

1. Form 1120 deductions:Cost of goods solda.

b. Compensation of officers


d. Repairs and maintenance

Bad debtse.

f. Rents

g. Taxes and licenses

h. Interest

i. Depreciation

j. Depletion

k. Advertising

l. Other deductions

1.00Total Form 1120 deductions

2. Schedule D losses3. Form 4797 losses

(d) Alloweddeductions and

losses

(c) Unalloweddeductions and

losses

(a) Deductionsand losses

Name of activity: (b) Ratio

1. Form 1120 deductions:

Cost of goods solda.

Compensation of officersb.


d.

Bad debtse.

Rentsf.

Taxes and licensesg.

Interesth.

Depreciationi.

Depletionj.

Advertisingk.

Other deductionsl.1.00Total Form 1120 deductions

2. Schedule D losses3. Form 4797 losses

Repairs and maintenance

Form 1120Gross receipts $100,000

Deductions 120,000

Net loss ($20,000)

Schedule D Form 4797Gain $1,000 Gain $5,000

Loss (2,000) Loss (2,000)

Net loss ($1,000) Net gain $3,000

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Publicly TradedPartnerships (PTPs)A publicly traded partnership (PTP) is apartnership whose interests are traded onan established securities market or arereadily tradable on a secondary market(or its substantial equivalent).

An established securities marketincludes any national securities exchangeand any local exchange registered underthe Securities Exchange Act of 1934 or

exempted from registration because ofthe limited volume of transactions. It alsoincludes any over-the-counter market.

A secondary market generally existswhere a person stands ready to make amarket in the interest. An interest istreated as readily tradable if the interestis regularly quoted by persons, such asbrokers or dealers, who are making amarket in the interest.

The substantial equivalent of asecondary market exists where there isno identifiable market maker, but theholder of an interest has a readilyavailable, regular, and ongoingopportunity to sell or exchange an interest

through a public means of obtaining orproviding information of offers to buy, sell,or exchange interests. Similarly, thesubstantial equivalent of a secondarymarket exists where the prospectivebuyers and sellers have the opportunityto buy, sell, or exchange interests in atimeframe and with the regularity andcontinuity that the existence of a marketmaker would provide.

Special Instructions for PTPs

Section 469(k) provides that the passiveactivity limitations must be appliedseparately to items from each PTP.

Losses from passive activities the

corporation holds through a PTPgenerally can be used only to offsetincome or gain from passive activities ofthe same PTP. Any unallowed loss froma PTP passive activity is carried forwardand allowed in a tax year when thecorporation has passive income from thesame PTP or when the corporationdisposes of its entire interest in that PTP.

Income from passive activities thecorporation holds through a PTP cannotbe used to offset losses from passiveactivities the corporation holds throughanother PTP or losses from any otherpassive activities.Passive activity loss rules for partners

in PTPs. Do not include any income,gains, deductions, or losses from PTPpassive activities on Form 8810. Instead,use the following rules to figure and reportincome, gains, deductions, and lossesfrom passive activities held through eachPTP that the corporation owned aninterest in during the tax year:1. Combine any current year income,gains, deductions, and losses, and prioryear unallowed losses to see if there isan overall gain or loss. Include only thesame types of income and losses thatwould be included in figuring net income

or loss from a non-PTP passive activity(see Passive Activity Income andDeductions on page 5).2. If there is an overall gain, the net gainportion (total income in excess of totaldeductions and losses) is nonpassiveincome. Report the income, deductions,and losses on the forms and schedulesnormally used.3. If there is an overall loss (other thanin a year in which the corporationdisposed of its entire interest in the PTP),

the deductions and losses are allowed tothe extent of the income, and the excessdeductions and losses are carried forwardfor use in a future year when there isincome to offset them. Report the incomeand the loss allowed to the extent ofincome on the form or schedule normallyused.

Part II1998Passive Activity CreditsUse Part II of Form 8810 to figure theamount of credits allowed from passiveactivities for the current year and theamount that is unallowed and carried

forward.The following credits from passive

activities are included on Form 8810:q Investment credit (including therehabilitation credit, energy credit, andreforestation credit);q Work opportunity credit;q Welfare-to-work credit;q Credit for alcohol used as fuel;q Credit for increasing research activities;q Low-income housing credit;q Enhanced oil recovery credit;q Disabled access credit;q Renewable electricity production credit;q Empowerment zone employment credit;q Indian employment credit;q Credit for employer social security andMedicare taxes paid on certain employeetips;q Orphan drug credit;q Credit for contributions to selectedcommunity development corporations;q Trans-Alaska pipeline liability fundcredit;q General credits from an electing largepartnership;q Possessions corporation tax credit;q Qualified electric vehicle credit; andq Nonconventional source fuel credit.

Worksheet 5Use Worksheet 5 on page 11 to figure theamounts to enter on lines 5a and 5b ofForm 8810.Column (a). Convert any current yearqualified expenditures into credits beforebeginning Worksheet 5. Use the followingforms:Form 3800, General Business Credit.Enter the credits from line 2 of Form 3800in column (a) of Worksheet 5. If thecredits are from more than one activity ormore than one type of credit, separate the

credits by activity or type before makingentries in the worksheet. For example,the corporation has a welfare-to-workcredit from one passive activity and adisabled access credit from a differentpassive activity. Enter the welfare-to-workcredit and the disabled access credit onseparate lines in column (a) of Worksheet5.Form 5735, Possessions CorporationTax Credit. Enter the portion of the creditattributable to passive activities from line

17 or line 27 of Form 5735 in column (a)of Worksheet 5.Form 8586, Low-Income HousingCredit. If the corporation is not requiredto file Form 3800, enter the portion of thecredit attributable to passive activitiesfrom line 6 of Form 8586 in column (a) ofWorksheet 5.Form 8834, Qualified Electric VehicleCredit. Enter the credits from line 10 ofForm 8834 in column (a) of Worksheet 5.If the credits are from more than oneactivity, separate the credits by activitybefore making entries in the worksheet.Form 8844, Empowerment ZoneEmployment Credit. Enter the credits

from line 5 of Form 8844 in column (a) ofWorksheet 5. If the credits are from morethan one activity, separate the credits byactivity before making entries in theworksheet.Nonconventional source fuel credit.Figure the credit from passive activities forfuel produced from a nonconventionalsource and enter the credit in column (a)of Worksheet 5. See section 29 for moreinformation on the credit for fuel producedfrom a nonconventional source.Column (b). In figuring this year'spassive activity credit, the corporationmust take into account any credits frompassive activities disallowed for prior

years and carried forward to this year.Enter in column (b) of Worksheet 5 theprior year unallowed credits from column(c) of Worksheet 6 in the 1997 Form 8810instructions.Line 7. If any of the following apply, enterzero on line 7 and do not complete Part Ior Part II of the Computation for Line 7on page 11.q The corporation is a personal servicecorporation with a loss or zero on line 1dof Form 8810.q The corporation is a personal servicecorporation with net passive income online 1d of Form 8810 and the corporationhas an overall loss from the entiredisposition of a passive activity that isequal to or greater than the net incomeon line 1d.q The corporation is a closely heldcorporation with a loss or zero on line 1dof Form 8810 and that amount is equal toor greater than the net active income online 2 of Form 8810.q The corporation is a closely heldcorporation with net income on line 3 ofForm 8810, and the corporation has anoverall loss from an entire disposition that

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Worksheet 5For Form 8810, Lines 5a and 5b

(a) Current YearCredits (line 5a)

(b) Prior YearUnallowed Credits

(line 5b)

(c) Total Credits(add columns (a)

and (b))From FormName of activity

Totals. Enter on lines 5a and 5b of Form 8810

is equal to or greater than the net incomeon line 3.

Part I of the Computation for Line 7below is used by personal servicecorporations and closely heldcorporations with net passive income.

Part II is used by closely heldcorporations that have net active income.See the line 2 instructions on page 8 forthe definition of net active income. If the

corporation has both net passive incomeand net active income, complete Part Iand Part II and enter the amount from lineQ on line 7 of Form 8810.Note: When using taxable income in thecomputation for line 7, it is not necessaryto refigure items based on taxableincome, such as the contributionsdeduction, dividends-received deduction,and the net operating loss deduction.

Use the applicable tax rates in section11 when figuring the tax attributableamounts. Also, see how to figure tax inthe instructions for the tax return filed.

Computation for Line 7

E. Tax attributable to line D. Figure thetax on the line D amount as if it werethe corporation's only taxable income.

Line C. Enter the net income, if any, fromline 1d of Form 8810. If the corporationhas an overall loss from the entiredisposition of a passive activity, theamount to enter on line C is the netincome from line 1d reduced by theoverall loss, but not below zero. If theresult is zero, skip the rest of the Part Icomputation.Line J. If the corporation has net passiveincome, enter the amount from line C onthis line. If the corporation has a net lossfrom line 1d of Form 8810, enter thatamount on line J as a negative amount.Line 9. If the corporation has one typeof credit, the amount on line 9 is the creditallowed for the year. See ReportingAllowed Credits on Tax Return on page12.

Use Worksheet 6 on page 12 to figurehow much of the credit on line 9 isallowed for each activity. Keep a recordof the unallowed credit and the activity towhich it belongs to figure the creditallowed next year.

F. Tax attributable to net passiveincome. Subtract line E from line A.Closely held corporations that do nothave net active income and personalservice corporations enter the amounthere and on line 7 of Form 8810 ........

Part IITax Attributable to Net ActiveIncome

G. Enter amount from line E if Part I iscompleted. Otherwise, enter incometax before credits from Form 1120(Schedule J, line 3) .................. ...........

H. Taxable income fromForm 1120........................

I. Net active income ............J. Net passive income or

loss. See instructions forline J below ................ ......

K. Add lines I and J. If lessthan -0-, enter as anegative amount ..............

L. Subtract line K from lineH. If zero or less, enter -0-here and on line M below.

M. Tax attributable to line L. Figure thetax on the line L amount as if it werethe corporation's only taxable income.

N. Subtract line M from line G. If zero orless, enter -0- here and on line P .......Part ITax Attributable to Net Passive

IncomeO. Enter the corporation's nonpassive

credits without regard to the taxliability limitations.................................

A. Income tax before credits from Form1120 (Schedule J, line 3) ................ ....

P. Tax attributable to net active income.Subtract line O from line N..................

Q. Tax attributable to net passiveincome and net active income. Addlines F and P. Enter the result hereand on line 7 of Form 8810.................

B. Taxable income fromForm 1120........................

C. Net passive income. Seeinstructions for line Cbelow ................................

D. Subtract line C from lineB. If zero or less, enter -0-here and on line E below.

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Worksheet 6Allowed and Unallowed Credits

(d) Allowed Credits(c) Unallowed Credits(b) Ratio(a) CreditsForm To Be

Reported onName of activity

Totals 1.00

Worksheet 6Use Worksheet 6 to allocate the allowed and unallowed credits for each activity.

Column (a). Enter the total credits from column (c) of Worksheet 5.

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 equal1.00.

Column (c). Multiply line 8 of Form 8810 by the ratios in column (b) and enter the results in column (c). These are theunallowed credits for 1998. Keep a record of these amounts, so the credits can be carried to the next year.

Column (d). Subtract column (c) from column (a). These are the allowed credits for 1998. The amounts in this column shouldbe reported on the forms normally used. See Reporting Allowed Credits on Tax Return below.

Reporting AllowedCredits on Tax Return

Form 3800. Enter on line 5 of Form 3800the total passive activity general businesscredit allowed from column (d) ofWorksheet 6.Form 5735. Enter on line 17 or line 27of Form 5735 any allowed possessionscorporation tax credit. To the left of theentry, write PAC.Form 8586. If the corporation is notrequired to file Form 3800, enter on line7 of Form 8586 any allowed low-incomehousing credit.Form 8834. Enter on line 12 of Form8834 the passive activity qualified electricvehicle credit allowed from column (d) of

Worksheet 6.Form 8844. Enter on line 7 of Form 8844the passive activity empowerment zoneemployment credit allowed from column(d) of Worksheet 6.Nonconventional source fuel credit. Ifthe corporation has an allowed passiveactivity credit for fuel produced from anonconventional source, see section 29for limitations and adjustments to thecredit. Attach a separate schedule to thetax return showing how the credit wasfigured. Combine any nonpassive credits

for fuel from a nonconventional sourcewith the passive activity credit before

applying the limitations and adjustments.Report the credit on the line specified bythe instructions for the tax return beingfiled.

Credits From PTPs

A credit from a passive activity heldthrough a PTP is allowed to the extent ofthe tax attributable to net passive incomefrom that PTP. See page 10 for thedefinition of a PTP.

Do not enter credits from PTPs onForm 8810 or the worksheets. Instead,use the following steps to figure theallowed and unallowed credits frompassive activities held through PTPs:

1. Figure the tax attributable to netpassive income for each PTP with currentyear passive activity credits or prior yearunallowed credits.

2. Use the smaller of the taxattributable to net income from passiveactivities of the PTP or the credit(including prior year unallowed credits)from passive activities of the PTP as theamount allowed. Report the allowedcredits on the form normally used andkeep a record of the unallowed credits tobe carried to the next year.

Part IIIElection To Increase

Basis of Credit PropertyLine 10. Check the box on this line if thecorporation elects to increase the basisof credit property it used in a passiveactivity or former passive activity by theunallowed credit that reduced theproperty's basis.

The election is available for a fullytaxable disposition of an entire interest inan activity for which a basis adjustmentwas made as a result of placing in serviceproperty for which a credit was taken. Thecorporation may elect to increase thebasis of the credit property immediatelybefore the disposition (by an amount nogreater than the amount of the original

basis reduction) to the extent that thecredit has not previously been allowedbecause of the passive credit limitations.The amount of the unallowed credit thatmay then be applied against tax isreduced by the amount of the basisadjustment.

No basis adjustment may be electedon a partial disposition of the corporation'sinterest in a passive activity or if thedisposition is not fully taxable. Theamount of any unallowed credit, however,remains available to offset the taxattributable to net passive and net activeincome.

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us internal revenue service: i8810--1998

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