![]() ![]() Even though the rules do not apply to grantor trusts, partnerships and S corporations directly, they do apply to the owners of those entities who are individuals. In addition to individuals, the passive activity rules also apply to estates, business trusts, personal service corporations and closely-held corporations. Between the passive loss limitations and the at-risk rules, it is challenging for an individual to be able to claim energy tax credits, depreciation or interest expense from investing in renewable energy projects. Separate at-risk rules bar individuals from deducting interest on nonrecourse loans and claiming depreciation deductions funded with nonrecourse debt. The passive activity loss rules have been around since 1986, enacted as a response to the tax shelters of the 1980s that taxpayers used to generate tax losses to shelter wages and investment portfolio income from taxes.Īs a general matter, the passive activity loss rules bar individuals from using depreciation, tax credits and interest (other than home mortgage interest) to reduce taxes on salaries and investment income. ![]() This makes it hard to tap individuals as potential tax equity investors for solar and other renewable energy projects. The tax credits can only be used against income from other passive investments in the same activity. This means that most individuals cannot claim production tax credits or investment tax credits. The passive activity loss rules prevent individuals from using tax credits and losses incurred from businesses in which they are not materially involved against active income from other sources. Ever wonder why as an individual, you probably cannot claim the investment tax credit or production tax credits?
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