Answer the following statements true (T) or false (F)

Question

1. Partnerships and S corporations must classify 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.
2. Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.
3. For purposes of the application of the passive loss limitations, a closely held C corporation is a C corporation in which more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.
4. A closely held C corporation's passive losses may offset its portfolio income.
5. Individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses, subject to AGI limitations.

Answer 1

1. TRUE
Each partner or shareholder then takes the results from these activities and, using the same rules, combines them where appropriate with operations conducted either directly or through other pass-through entities.
2. TRUE
Explanation: The general rule for material participation is completion of more than 500 hours.
3. TRUE
The question provides a correct definition of a closely held corporation for purposes of the passive loss limitations.
4. FALSE
A closely held corporation is allowed to deduct excess passive losses against active trade or business income, but cannot offset portfolio income.
5. TRUE
A rental real estate activity which does not meet the real property trade or business standard may still allow recognition of losses up to $25,000 if the owner meets certain criteria.