Part II - 2002 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. The following credits from passive activities are included on Form 8810.

• Investment credit (including the rehabilitation credit, energy credit, and reforestation credit).
• Work opportunity credit.
• Welfare-to-work credit.
• Credit for alcohol used as fuel.
• Credit for increasing research activities.
• Low-income housing credit.
• Enhanced oil recovery credit.
• Disabled access credit.
• Renewable electricity production credit.
• Indian employment credit.
• Credit for employer social security and Medicare taxes paid on certain employee tips.
• Orphan drug credit.
• Credit for small employer pension plan startup costs.
• Credit for employer-provided child care facilities and services.
• Empowerment zone and renewal community employment credit.
• New York Liberty Zone business employee credit.
• Trans-Alaska pipeline liability fund credit.
• General credits from an electing large partnership.
• Possessions corporation tax credit.
• Qualified electric vehicle credit.
• Nonconventional source fuel credit.

Worksheet 5

Use Worksheet 5 on page 11 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, Possessions Corporation Tax Credit.   Enter the portion of the credit attributable to passive activities from line 17 or line 27 of Form 5735 in column (a) of Worksheet 5.

Form 8586, Low-Income Housing Credit.   If the corporation is not required to file Form 3800, enter the portion of the credit attributable to passive activities from line 6 of Form 8586 in column (a) of Worksheet 5.

Form 8834, Qualified Electric Vehicle Credit.   Enter the credits from line 11 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 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 8884, New York Liberty Zone Business Employee Credit.   Enter the credits from line 5 of Form 8884 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.

Worksheet 5

Nonconventional source fuel credit.   Figure the credit from passive activities for fuel produced from a nonconventional source and enter the credit in column (a) of Worksheet 5. See section 29 for more information on the credit for fuel produced from a nonconventional source.

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 2001 Form 8810 instructions.

Line 7.   If any of the following apply, enter zero on line 7 and do not complete Part I or Part II of the Computation for Line 7 on page 11.

• 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.

Part I of the Computation for Line 7 below is used by personal service corporations and closely held corporations with net passive income.

Part II is used by closely held corporations that have net active income. See the line 2 instructions on page 8 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.

Computation for Line 7

Part I - Tax Attributable to Net Passive Income

A.	Income tax before credits from Form 1120 (Schedule J, line 3)
B.	Taxable income from Form 1120
C.	Net passive income. See instructions for line C below
D.	Subtract line C from line B. If zero or less, enter -0- here and on line E below
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 3)
H.	Taxable income from Form 1120
I.	Net active income
J.	Net passive income or loss. See instructions for line J below
K.	Add lines I and J. If less than -0-, enter as a negative amount
L.	Subtract line K from line H. If zero or less, enter -0- here and on line M below
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

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 on page 12.

Use Worksheet 6 on page 12 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.

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 17 or line 27 of Form 5735 any allowed possessions corporation tax credit. To the left of the entry, write PAC.

Form 8586.   If the corporation is not required to file Form 3800, enter on line 7 of Form 8586 any allowed low-income housing credit.

Form 8834.   Enter on line 13 of Form 8834 the passive activity qualified electric vehicle 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 8884.   Enter on line 7 of Form 8884 the passive activity New York Liberty Zone business employee credit allowed from column (d) of Worksheet 6.

Nonconventional source fuel credit.   If the corporation has an allowed passive activity credit for fuel produced from a nonconventional source, see section 29 for limitations and adjustments to the credit. Attach a separate schedule to the tax return showing how the credit was figured. Combine any nonpassive credits for fuel from a nonconventional source with the passive activity credit before applying the limitations and adjustments. Report the credit on the line specified by the instructions for the tax return being filed.

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 10 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.

Worksheet 6 on Page 12

Part III - Election To Increase Basis of Credit Property

Line 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 may 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 may then be applied against tax is reduced by the amount of the basis adjustment.

No basis adjustment may 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.

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