When you own more than one Idaho business, you need to consider the grouping rules that apply for passive-loss purposes.
Should one of your Idaho businesses lose money, you may not deduct the losses from that business during the current tax year unless you:
Example. Sam Warren, MD, operates a medical practice and starts a new physical therapy business (his second business) in which he will not materially participate. The physical therapy business is going to lose money during its first years of operation. If Dr. Warren wants to deduct the losses from his physical therapy business, he has one choice: group that business with his medical practice.
Overview of Passive-Loss Rules
Dr. Warren knows that he will have tax losses in his physical therapy business during its start-up years. Because he will not materially participate in the physical therapy business, the tax code deems his losses passive. He may deduct his passive losses
- against his passive income from other sources (excess passive losses are carried forward); and
- in total, when he sells or otherwise disposes of his entire interest in the passive activity.
This is ugly.
First, Dr. Warren has no other passive income. The medical practice, his only other business or activity, is an active business that produces active income.
Second, he does not plan on selling the physical therapy business anytime soon, so he would not realize any benefit from the accumulation of his carried-forward passive losses.
His solution: the group.
Grouping to Achieve Material Participation
For purposes of meeting the standards for material participation, you may group your business activities into appropriate economic units.
Whether activities constitute an appropriate economic unit, and therefore may be treated as a single activity, depends on the relevant facts and circumstances. You may use any reasonable method of applying the relevant facts and circumstances in grouping activities.
The five factors listed below (not all of which are necessary for you to treat more than one activity as a single activity) are given the greatest weight in determining whether activities constitute an appropriate economic unit for the measurement of gain or loss:
Entities do not limit activities. You can have more than one activity inside an entity.
Related businesses and activities can be conducted by Schedule C proprietorships, partnerships, C or S corporations, or limited liability companies, all of which may be grouped if they are appropriate economic units into one activity.
Example. Your solely owned an Idaho S corporation owns a bakery and a movie theater at a shopping mall in Idaho and a bakery and a movie theater in Sandpoint. The S corporation’s common ownership indicates that you may group all four activities into one activity to prove your material participation so that you can deduct any losses.