Grouping Your Business Activities

The passive loss rules apply to each separate "activity". An "undertaking" is the smallest unit that can constitute an "activity". Each operation that constitutes a separate source of income is a separate undertaking. The basic activity rule treats each undertaking in which you own an interest as a separate activity. It is possible to treat one or more trade or business activities or rental activities as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules.

Appropriate economic unit- to determine if more than one activity forms an appropriate economic unit, you must consider all the relevant facts and circumstances. The following is a list of factors that are commonly used to determine whether activities are treated as an appropriate economic unit.

  1. The similarities and differences in the types of trade or businesses.
  2. The extent of common control.
  3. The extent of common ownership.
  4. The geographical location.
  5. The interdependencies between or among activities, which may include the extent to which the activities:
    1. Purchase or sell goods between or among themselves
    2. Involve products or services that are generally provided together
    3. Have the same customers
    4. Have the same employees
    5. Use a single set of books or records to account for the activities

Two operations are similar if there are predominant operations in each undertaking; and the predominant operations of both undertakings are in the same "line of business." Lines of business are broadly defined by two digit Standard Industrial Classification (SIC) Codes. The following lines of business may be associated with timber growing operations.

  • Division A: Agriculture, Forestry, And Fishing
    • Major Group 01: Agricultural Production Crops
    • Major Group 02: Agricultural Production Livestock And Animal Specialties
    • Major Group 07: Agricultural Services
    • Major Group 08: Forestry
    • Major Group 09: Fishing, Hunting, And Trapping
  • Division D: Manufacturing
    • Major Group 24: Lumber And Wood Products, Except Furniture
    • Major Group 26: Paper And Allied Products
  • Division F: Wholesale Trade
    • Major Group 50: Wholesale Trade-durable Goods
    • Major Group 51: Wholesale Trade-non-durable Goods
  • Division G: Retail Trade
    • Major Group 52: Building Materials, Hardware, Garden Supply, And Mobile Home Dealers