Corporate Passive Activity Loss and Credit Limitations

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Instructions for Form 8810

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2007

Department of the Treasury
Internal Revenue Service

Instructions for Form 8810
Corporate Passive Activity Loss and Credit Limitations
Section references are to the Internal
Revenue Code unless otherwise noted.
Contents
General Instructions . . . . . . . . . .
Purpose of Form . . . . . . . . . . . .
Who Must File . . . . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . . .
Coordination With Other
Limitations . . . . . . . . . . . . . . . .
Special Rules for Consolidated
Group . . . . . . . . . . . . . . . . . . .
Activities That Are Not Passive
Activities . . . . . . . . . . . . . . . . .
Rental Activities . . . . . . . . . . . . .
Trade or Business Activities . . . .
Material Participation . . . . . . . . .
Grouping of Activities . . . . . . . . .
Passive Activity Income and
Deductions . . . . . . . . . . . . . . .
Former Passive Activities . . . . . .
Dispositions . . . . . . . . . . . . . . .
Specific Instructions . . . . . . . . . .
2007 Passive Activity Loss (PAL)
Publicly Traded Partnerships
(PTPs) . . . . . . . . . . . . . . . . . .
2007 Passive Activity Credits . . .
Election To Increase Basis of
Credit Property . . . . . . . . . . . .

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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. It 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.

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.
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.
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 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 of
personal services are for services performed
by employee-owners.
Cat. No. 10357E

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).
For more information about personal
service corporations, see Regulations
section 1.441-3(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, PALs are subject to other
limitations (for example, basis, section 163(j)
interest deduction limitations, and at-risk
limitations) before they are subject to the
PAL limitations. Once a loss becomes
allowable under these other limitations, the
corporation must determine whether the loss
is limited under the PAL rules. See Form
6198, At-Risk Limitations, for details on the

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at-risk rules. Also, capital losses that are
allowable under the PAL rules may be
limited under the capital loss limitations of
section 1211(a). Percentage depletion
deductions that are 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 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.
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.
Note. If an activity qualifies for the
exception described above in 2007, 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 on page 5.
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 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 partner
interest to a limited partner 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)(ii).
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.

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
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.

Exceptions
An activity is not a rental activity if:
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.
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).
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 excluded services. See Temporary
Regulations section 1.469-1T(e)(3)(iv)(B).
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

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performed by individuals and the 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 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.
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.

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 activity.
The corporation then must determine:
1. Whether the rental of the property is a
trade or business activity (see Trade or
Business Activities on page 3) 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 on page 3.

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If the corporation meets any of the five
exceptions listed above 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 on
page 5 apply. See PAL rules for partners in
PTPs on page 9.
If none of the special rules apply, use
Worksheets 1 and 2 on page 6 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 on page 9 to
figure the amount to enter in Part II of Form
8810.

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 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 on page 6 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) on
page 9. See 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 on
page 9 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 on page 10
for details about how to report credits from
these activities.

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.
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.

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• 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 would
materially participate 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.
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
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 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 or
consulting 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 did 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

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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).
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 partner interest if one or more
individuals (each of whom would materially
participate in the activity under test 1, 5, or
6, on page 3, 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 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 partner interest).
A limited partner’s share of an electing
large partnership’s taxable income or loss
and credits (including general business
credits) from all trade or business and rental
activities is treated as income or loss from
the conduct of a single passive trade or
business activity.
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. Reliance between or among the
activities.
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.
Once the corporation chooses a grouping
under these rules, it must continue using
that grouping in later tax years unless a
material change in the facts and
circumstances makes that grouping clearly
inappropriate.
The IRS may regroup the activities if the
grouping fails to reflect one or more
appropriate economic units and one of the
primary purposes of the grouping is to avoid
the passive activity limitations.
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.
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 (as
defined in section 464(e)(2)) if that other
activity engages in 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:
• 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.
Partial disposition of an activity. The
corporation can treat the disposition of
substantially all of an activity 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.

Passive Activity Income
and Deductions
Take into account only passive activity
income and passive activity deductions to

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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 on page 7 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.
Passive activity income does not include
the following.
• Income from an activity that is not a
passive activity.
• 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. 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 on
page 5.
• Overall gain from any interest in a PTP.

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Instructions for Form 8810

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• 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.
• 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
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
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 on page 3) 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). See Regulations
section 1.469-1(f)(4).
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.
• 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 on page 4). 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.

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.
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.
To report a disposition of a former
passive activity, follow the rules under
Dispositions below.

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.
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

-5-

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 PAL 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.

Reporting an Entire Disposition
on Schedule D (Form 1120),
Capital Gains and Losses, or
Form 4797, Sales of Business
Property
When the corporation completely disposes
of an entire interest in a passive activity or a
former passive activity, there may be net
income or loss and prior year unallowed
losses from the activity. All the income,
gains, deductions, and losses are reported
on the forms and schedules normally used.
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 on page 6. 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.
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.

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Instructions for Form 8810

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Specific Instructions

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

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

Worksheet 1

Name of Activity:

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
Form 4797 and Schedule D (Form 1120).
Line 5. Enter total income on this line and in
column (a) of Worksheet 2.
Lines 6a through 6l. Enter passive activity
deductions.
Lines 8 and 9. Enter PALs reported on
Schedule D (Form 1120) and Form 4797.
Line 10. Enter total deductions and losses on
this line and in column (b) of Worksheet 2.
Gross receipts, gains from the sale of business
assets, capital gains, and other 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.

1.

Gross receipts . . . . . . . . .

2.

Schedule D (Form 1120)
gains . . . . . . . . . . . . . . . .

3.

Form 4797 gains . . . . . . . .

4.

Other passive income . . . .

5.

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

6.

Deductions: . . . . . . . . . .

Name of Activity:

a. Cost of goods sold . . . . . .
b. Compensation of officers . .
c. Salaries and wages . . . . . .
d. Repairs and maintenance . .
e. Bad debts . . . . . . . . . . . .

Worksheet 2

f.

Columns (a) and (b). Enter in column (a) the
total income for the current year shown on line
5 in Worksheet 1. Enter in column (b) the total
deductions and losses shown on line 10 in
Worksheet 1.
Column (c). Enter the prior year unallowed
losses that can be found in Worksheet 4,
column (c) of the 2006 Form 8810 instructions.
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 overall gain in
column (d) or any overall loss in column (e). Do
not enter the amounts in 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.

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 (Form 1120)
losses . . . . . . . . . . . . . . .

9.

Form 4797 losses . . . . . . .

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

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)

Totals. Enter on lines 1a, 1b, and
1c of Form 8810 . . . . . . . . . . . . 䊳

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(c) Unallowed
Losses (Line 1c)

Overall Gain or Loss
(d) Gain

(e) Loss

Page 7 of 11

Instructions for Form 8810

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Part I. 2007
Passive Activity Loss
(PAL)
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, and any
losses from Form 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 been reported
on page 1 of Form 1120 instead of on Form
4797 or Schedule D (Form 1120), 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 on page 4.
• 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
line 1d of Form 8810).
If there is an overall loss from all other
passive activities (line 1d of Form 8810 is a
loss), figure net active income by taking into
account all of the overall loss from that
activity.

Line 4. Total Deductions and
Losses Allowed
Columns (d) and (e) of Worksheet 2, on
page 6, show whether an activity had an
overall gain or loss.
Worksheet 2, column (d). A
corporation with an overall gain in column
(d) will report all of the deductions and
losses listed in Worksheet 1 and any prior
year unallowed losses in Worksheet 2 for
those activities on the appropriate lines of
Form 1120 and on Schedule D (Form 1120)
or Form 4797, if applicable.
Worksheet 2, column (e). A
corporation uses Worksheets 3 and 4 for
activities that show an overall loss in column
(e).
Worksheet 3. Use Worksheet 3, below,
to figure the unallowed deductions and
losses to be carried forward to Worksheet 4,
on page 8. Use Worksheet 4 to figure the
allowed deductions and losses to report on
the forms and schedules for 2007.

Worksheet 3
Overall loss in column (e). 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.
Overall gain in column (d). 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 or Schedule D (Form 1120), if applicable.
Prior year unallowed losses from 2006. If there were prior year unallowed losses from 2006, 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 Schedule D (Form 1120) should have been kept separate in 2006,
and should be identified as “prior year unallowed losses” on Form 4797 and Schedule D (Form 1120).
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 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 line 3 of Form 8810 by each of the ratios in column (b) and enter the results in
column (c).
Worksheet 4. Use Worksheet 4 to figure the allowed deductions and losses.

Worksheet 3 –Allocation of Unallowed Deductions and Losses
Name of Activity

(a) Loss From
Worksheet 2 Column (e)

Totals . . . . . . . . . . . . . . . . . . . . . . . . . 䊳

(b) Ratio

1.00

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(c) Unallowed Deductions
and Losses

Page 8 of 11

Instructions for Form 8810

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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 and
Schedule D (Form 1120).
If the unallowed loss is reported on one
form or schedule, skip the following example
and complete Worksheet 4.
If the unallowed loss is from losses
reported on more than one form or
schedule, allocate the unallowed loss from
column (c) of Worksheet 3 among the net
losses as follows.
Example. The corporation has one passive
activity. The activity has an unallowed loss
of $18,000 in column (c) of Worksheet 3 and
the following net losses and net gain.
Form 1120
Gross receipts
Deductions
Net loss
Schedule D (Form
1120)
Gain
$1,000
Loss
(2,000)
Net loss
($1,000)

$100,000
120,000
($20,000)
Form 4797

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
and enter the allowed Schedule D (Form
1120) and Form 4797 losses on that form or
schedule.

Worksheet 4 —Allowed Deductions and Losses
Name of Activity:

(a) Deductions
and Losses

(b) Ratio

(c) Unallowed
Deductions
and Losses

(d) Allowed
Deductions
and Losses

(c) Unallowed
Deductions
and Losses

(d) Allowed
Deductions
and Losses

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

Gain
Loss
Net gain

$5,000
(2,000)
$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:

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 Schedule D (Form
1120) or Form 4797 loss in column (c) of
this worksheet.

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

Schedule D
$1,000
(Form
x $18,000 = $857
$21,000
1120):

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 Schedule D (Form
1120) 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 Schedule D (Form
1120) loss.
Line 1, column (a). Enter the current year
deductions for each Form 1120 expense
(lines 6a through 6l of Worksheet 1) plus
any prior year unallowed Form 1120
deduction for that activity. For example, if
line 6i of Worksheet 1 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 line
1i, column (a), of Worksheet 4.
Line 2, column (a). Enter any Schedule D
(Form 1120) losses from line 8 of Worksheet
1 plus any prior year unallowed Schedule D
(Form 1120) losses for that activity.
Line 3, column (a). Enter any Form 4797
losses from line 9 of Worksheet 1 plus any
prior year unallowed Form 4797 losses for
that activity.
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.

f. Rents . . . . . . . . . . . . . .
g. Taxes and licenses . . . . .
h. Interest . . . . . . . . . . . . .
i. Depreciation . . . . . . . . . .
j. Depletion . . . . . . . . . . . .
k. Advertising . . . . . . . . . .
l. Other deductions . . . . . . .
Total Form 1120
deductions: . . . . . . . . . . . 䊳

1.00

2. Schedule D (Form 1120)
losses . . . . . . . . . . . . . . .
3. Form 4797 losses . . . . . . .
Name of Activity:

(a) Deductions
and Losses

(b) Ratio

1. 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 . . . . . . . . . . . 䊳
2. Schedule D (Form 1120)
losses . . . . . . . . . . . . . . .
3. Form 4797 losses . . . . . . .

-8-

1.00

Page 9 of 11

Instructions for Form 8810

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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 PAL
limitations must be applied separately to
items from each PTP.
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.
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 on page 4).
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. 2007 Passive
Activity Credits
Use Part II of Form 8810 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
Use Worksheet 5 below to figure the
amounts to enter on lines 5a and 5b of Form
8810.
Column (a). Convert any current year
qualified expenditures into credits before
beginning Worksheet 5. Use the following
forms.
Form 3800, General Business Credit.
Enter the credits from line 3 of Form 3800 in
column (a) of Worksheet 5. If the credits are
from more than one activity or more than
one type of credit, separate the credits by
activity or type before making entries in the
worksheet. For example, the corporation
has a welfare-to-work credit from one
passive activity and a disabled access credit
from a different passive activity. Enter the

welfare-to-work credit and the disabled
access credit on separate lines in column
(a) of Worksheet 5.
Form 5735, American Samoa Economic
Development Credit. Enter the portion of
the credit attributable to passive activities
from line 12 of Form 5735 in column (a) of
Worksheet 5.
Form 5884, Work Opportunity Credit.
Enter the credits from line 5 of Form 5884 in
column (a) of Worksheet 5. If the credits are
from more than one activity, separate the
credits by activity before making entries in
the worksheet.
Form 6478, Credit for Alcohol Used as
Fuel. Enter the credits from line 7 of Form
6478 in column (a) of Worksheet 5. If the
credits are from more than one activity,
separate the credits by activity before
making entries in the worksheet.
Form 8834, Qualified Electric Vehicle
Credit. Enter the credits from line 2 of
Form 8834 in column (a) of Worksheet 5. If
the credits are from more than one activity,
separate the credits by activity before
making entries in the worksheet.
Form 8835, Renewable Electricity,
Refined Coal, and Indian Coal Production
Credit. Enter the credits from Section B of
Form 8835 in column (a) of Worksheet 5. If
the credits are from more than one activity,
separate the credits by activity before
making entries in the worksheet.
Form 8844, Empowerment Zone and
Renewal Community Employment Credit.
Enter the credits from line 5 of Form 8844 in
column (a) of Worksheet 5. If the credits are
from more than one activity, separate the
credits by activity before making entries in
the worksheet.
Form 8846, Credit for Employer Social
Security and Medicare Taxes Paid on
Certain Employee Tips. Enter the credits
from line 7 of Form 8846 in column (a) of
Worksheet 5. If the credits are from more
than one activity, separate the credits by
activity before making entries in the
worksheet.
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. Enter in column (b) of
Worksheet 5 the prior year unallowed
credits from column (c) of Worksheet 6 in
the 2006 Form 8810 instructions.

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

(a) Current Year
Credits (Line 5a)

From Form

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

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(b) Prior Year
Unallowed Credits
(Line 5b)

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

Page 10 of 11

Instructions for Form 8810

10:58 - 25-SEP-2007

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

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 line 1d of
Form 8810.
• The corporation is a personal service
corporation with net passive income on line
1d of Form 8810 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 line 1d of
Form 8810 and that amount is equal to or
greater than the net active income on line 2
of Form 8810.
• The corporation is a closely held
corporation with net income on line 3 of
Form 8810, and the corporation has an
overall loss from an entire disposition that is
equal to or greater than the net income on
line 3.
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 line 2
instructions on page 7 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 line 7 of
Form 8810.
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,
dividends-received deduction, and the net
operating loss deduction.
Use the applicable tax rates in section 11
when figuring the tax attributable amounts.
Also, see how to figure tax in the
instructions for the tax return filed.
Line C. Enter the net income, if any, from
line 1d of Form 8810. 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
line 1d of Form 8810, enter that amount on
line J as a negative amount.

Line 9
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.
Use Worksheet 6 on page 11 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.

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 above . . .
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 line 7 of
Form 8810 . . . . . . . . . . . . . . . . . . .

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 above . . .
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 . . . . . . . . . . . . . . . . . . .
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 line 7 of
Form 8810 . . . . . . . . . . . . . . . . . . .

electricity, refined coal, and Indian coal
production credit allowed from column (d) of
Worksheet 6.
Form 8844. Enter on line 7 of Form 8844
the passive activity empowerment zone and
renewal community employment credit
allowed from column (d) of Worksheet 6.
Form 8846. Enter on line 9 of Form 8846
the passive activity credit for employer
social security and Medicare taxes paid on
certain employee tips allowed from column
(d) of Worksheet 6.

Credits From PTPs
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 page 9 for the definition of a PTP.
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 (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
Line 10

Reporting Allowed Credits on
Tax Return
Form 3800. Enter on line 5 of Form 3800
the total passive activity general business
credit allowed from column (d) of Worksheet
6.
Form 5735. Enter on line 12 of Form 5735
any allowed American Samoa economic
development credit. To the left of the entry,
enter “ASEDC.”
Form 5884. Enter on line 7 of Form 5884
the passive activity work opportunity credit
allowed from column (d) of Worksheet 6.
Form 6478. Enter on line 9 of Form 6478
the passive activity credit for alcohol used
as fuel allowed from column (d) of
Worksheet 6.
Form 8834. Enter on line 4 of Form 8834
the passive activity qualified electric vehicle
credit allowed from column (d) of Worksheet
6.
Form 8835. Enter in Section B of Form
8835 the passive activity renewable

-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 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.
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, remains
available to offset the tax attributable to net
passive and net active income.

Page 11 of 11

Instructions for Form 8810

10:58 - 25-SEP-2007

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Worksheet 6
Use 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 equal 1.00.
Column (c). Multiply line 8 of Form 8810 by the ratios in column (b) and enter the results in column (c). These are the unallowed
credits for 2007. 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 2007. The amounts in this column should be
reported on the forms normally used. See Reporting Allowed Credits on Tax Return on page 10.
Worksheet 6 — Allowed and Unallowed Credits
Name of Activity

Form To Be
Reported On

(a) Credits

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 䊳

(b) Ratio

(c) Unallowed
Credits

(d) Allowed Credits

1.00

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.
You are not required to provide the information requested on a form that is 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.
The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is:
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26 hr., 18 min.

Learning about the law or the form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 hr., 15 min.

Preparing and sending the form to the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 hr., 55 min.

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.

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