7915. What are the self-charged interest rules under the passive loss rules?Nuco Employeercline202014-07-07T22:38:00Z2014-07-07T22:38:00Z39065165Summit Business Media4312605914Site Map/Investments/Special Rules/Limitation on Loss Deductions/Passive Loss RuleTaxFactsDefaultArticle123231293-00-tf2.xml1293.00;#1958;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2Under the passive loss rule, what is a passive activity?44900.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T23:01:08Z7915. What are the self-charged interest rules under the passive loss rules?Interest income and deductions in connection with loans between a taxpayer and a “passthrough entity” (a partnership or S corporation) in which the taxpayer owns a direct or indirect interest may be allocated under the following “self-charged interest rules” rather than the rules discussed in Q 7911 to Q7814. An indirect interest means an interest held through one or more passthrough entities.Treas. Reg. §1.469-7.Taxpayer loans to the entity. The self-charged interest rules apply for a taxable year if: (1) the borrowing entity has deductions for its taxable year for interest charged by persons who own direct or indirect interests in the borrowing entity at any time during the entity’s taxable year; (2) the taxpayer owns a direct or indirect interest in the borrowing entity at any time during the entity’s taxable year and the taxpayer has gross income for the taxable year from interest charged to the borrowing entity by either the taxpayer or a passthrough entity through which the taxpayer holds an interest in the borrowing entity; and (3) the taxpayer’s share of the borrowing entity’s self-charged interest deductions includes passive activity deductions.Treas. Reg. §1.469-7(c)(1).If these rules apply, the passive activity gross income and passive activity deductions from that activity are determined under the following rules: (1) the applicable percentage of each item of the taxpayer’s income for the taxable year from interest charged to the borrowing entity is treated as passive activity gross income from the activity; and (2) the applicable percentage of each deduction for the taxable year for interest expense that is properly allocable to the taxpayer’s income from the interest charged to the borrowing entity is treated as a passive activity deduction from the activity.Treas. Reg. §1.469-7(c)(2).Interest expense is properly allocable to the taxpayer’s income if it is allocated under Temporary Treasury Regulation Section 1.163-8T to an expenditure that: (1) is properly chargeable to a capital account with respect to the investment producing the interest income; or (2) may reasonably be taken into account as a cost of producing the item of interest income.Treas. Reg. §1.469-7(f).The applicable percentage is determined by dividing (1) the taxpayer’s share for the taxable year of the borrowing entity’s self-charged interest deductions that are treated as passive activity deductions from the activity by (2) the greater of: (a) the taxpayer’s share for the taxable year of the borrowing entity’s aggregate self-charged interest deductions for all activities (regardless of whether the deductions are treated as passive activity deductions); or (b) the taxpayer’s aggregate income for the taxable year from interest charged to the borrowing entity for all activities of the borrowing entity. The applicable percentage is determined separately for each activity.Treas. Reg. §1.469-7(c)(3).Entity loans to the taxpayer. Similarly, the self-charged interest rules apply for a taxable year if (1) the lending entity has gross income for the entity taxable year from interest charged by the lending entity to persons who own direct or indirect interests in the lending entity at any time during the entity taxable year; (2) the taxpayer owns a direct or indirect interest in the lending entity at any time during the entity’s taxable year and has deductions for the taxable year for interest charged by the lending entity to the taxpayer or a passthrough entity through which the taxpayer holds an interest in the lending entity; and (3) the taxpayer’s deductions for interest charged by the lending entity include passive activity deductions.Treas. Reg. §1.469-7(d)(1).If the rules apply, the passive activity gross income and passive activity deductions from the activity are determined under the following rules: (1) the applicable percentage of the taxpayer’s share for the taxable year of each item of the lending entity’s self-charged interest income is treated as passive activity gross income from the activity; (2) the “applicable percentage” of the taxpayer’s share for the taxable year of each deduction for interest expense that is properly allocable to the lending entity’s self-charged interest income is treated as a passive activity deduction from the activity.Treas. Reg. §1.469-7(d)(2).Interest expense is properly allocable to the taxpayer’s income if it is allocated under Temporary Treasury Regulation Section 1.163-8T to an expenditure that: (1) is properly chargeable to a capital account with respect to the investment producing the interest income; or (2) may reasonably be taken into account as a cost of producing the item of interest income.Treas. Reg. §1.469-7(f).The applicable percentage is determined by dividing (1) the taxpayer’s deductions for the taxable year for interest charged by the lending entity, to the extent treated as passive activity deductions from the activity, by (2) the greater of: (a) the taxpayer’s aggregate deductions for all activities for the taxable year for interest charged by the lending entity (regardless of whether these deductions are treated as passive activity deductions); or (b) the taxpayer’s aggregate share for the taxable year of the lending entity’s self-charged interest income for all activities of the lending entity. The applicable percentage is determined separately for each activity.Treas. Reg. §1.469-7(d)(3).Special rules apply to situations where a loan occurs between identically-owned passthrough entities.Treas. Reg. §1.469-7(e).If the taxpayer and the passthrough entity have different taxable years or accounting methods, related interest income and interest deductions may be recognized in different years, possibly with adverse results.See Treas. Reg. §1.469-7(h) (Ex. 4).The self-charged interest rules apply to taxable years ending after 1986, unless the passthrough entity makes an election to have the rules not apply. Such an election applies to the taxable year for which the election is made and all subsequent years until the election is revoked. An election can be revoked only with the consent of the IRS.Treas. Reg. §1.469-11(a)(4); Treas. Reg. §1.469-7(g).