Partnerships and S corporations must identify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

Question

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Partnerships and S corporations are pass-through entities, which means that their income or losses are passed onto their partners or shareholders. In order to comply with the passive activity rules, the entity must first determine the nature of each activity (active or passive) and then report the results of each activity separately to the partners or shareholders. This ensures that each individual partner or shareholder can properly report their share of income or losses on their tax returns.

Partnerships and S Corporations Must Identify Their Business and Rental