Grouping — Instruction 8810 — Instructions for Form

Generally, one or more trade or business activities or rental activities may be treated as a single activity if the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Whether activities make up an appropriate economic unit depends on all the relevant facts and circumstances. The factors given the greatest weight in determining whether activities make up an appropriate economic unit are:

Similarities and differences in types of trades or businesses,
The extent of common control,
The extent of common ownership,
Geographical location, and
Interdependencies between or among the activities. This includes the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records.

Example. A corporation has a significant ownership interest in a bakery and a movie theater in Baltimore and in a bakery and a movie theater in Philadelphia. Depending on all the relevant facts and circumstances, there may be more than one reasonable method for grouping the activities. For instance, the following groupings may or may not be permissible.

owner of that type of activity would customarily do, and if one of the individual's main reasons for doing the work is to avoid the disallowance of losses or credits from the activity under the passive activity loss and credit rules.

Proof of participation. Participation in an activity can be proven by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if participation can be established by other reasonable means. Reasonable means for this purpose may include, but are not limited to, the identification of services performed over a period of time and the approximate number of hours spent performing the services during that period, based on appointment books, calendars, or narrative summaries.

Tests for investors. Work done as an investor in an activity is not treated as participation unless the individual was directly involved in the day-to-day management or operations of the activity. For purposes of this test, work done as an investor includes the following activities.

Studying and reviewing financial statements or reports on operations of the activity.
Preparing or compiling summaries or analyses of the finances or operations of the activity for the individual's own use.
Monitoring the finances or operations of the activity in a nonmanagerial capacity.

If the individual is married for the tax year, the individual's participation in an activity includes any participation in the activity during the tax year by that individual's spouse, whether or not the spouse owned any interest in the activity and whether or not the individual and spouse file a joint return for the tax year.

Tests for individuals. An individual materially participates in an activity of the corporation if one or more of the following tests are satisfied.

The individual participated in the activity for more than 500 hours during the tax year.
The individual's participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the corporation or the activity) for the year.
The individual participated in the activity for more than 100 hours during the tax year, and that individual participated at least as much as any other individual (including individuals who did not own any interest in the corporation or the activity) for the year.
The activity is a significant participation activity for the individual for the tax year, and the individual

participated in all significant participation activities during the year for more than 500 hours. For this purpose, an individual's participation in all activities other than activities of the corporation is disregarded.

A significant participation activity is any trade or business activity in which the individual participated for more than 100 hours during the year and in which the individual did not materially participate under any of the material participation tests (other than this fourth test). For more information regarding significant participation, see Pub. 925.

The individual materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
The activity is a personal service activity in which the individual materially participated for any 3 (whether or not consecutive) preceding tax years.

An activity is a personal service activity if it involves the performance of personal services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, or in any other trade or business in which capital is not a material income-producing factor.

Based on all the facts and circumstances, the individual participated in the activity on a regular, continuous, and substantial basis during the tax year.

The individual does not materially participate in the activity under this seventh test; however, if the individual participated in the activity for 100 hours or less during the tax year. Participation in managing the activity does not count in determining whether the individual materially participated under the test if:

a. Any person (except that individual) received compensation for performing services in the management of the activity, or

b. Any person in the activity spent more hours during the tax year than that individual spent performing services in the management of the activity (regardless of whether the individual was compensated for the management services).

Special rules for limited partners. Generally, a limited partner cannot materially participate in an activity. However, the corporation is considered to materially participate in an activity in which it holds a limited partnership interest if one or more individuals (each of whom would materially participate in the activity under test 1, 5, or 6, discussed above, for the tax year if the corporation's activity were the individual's activity) directly or indirectly own more than 50% (by value) of the corporation's outstanding stock.

A single activity.
A movie theater activity and a bakery activity.
A Baltimore activity and a Philadelphia activity.
Four separate activities. Once the corporation chooses a grouping under these rules, it must continue using that grouping in later tax years unless either:
The corporation determines that the original grouping was clearly inappropriate, or

4 Instructions for Form 8810 (2025)

A material change in the facts and circumstances makes that grouping clearly inappropriate.

The IRS may regroup the corporation's activities if any of the activities resulting from the corporation's groupings are not an appropriate economic unit and one of the primary purposes of the grouping (or failure to regroup as required under Regulations section 1.469-4(e)) is to avoid the underlying purposes of the passive activity rules.

The corporation must comply with disclosure requirements for certain changes to the corporation's groupings as described in Disclosure Requirement , later.

Limitation on grouping certain activi- ties. The following activities cannot be grouped together.

A rental activity with a trade or business activity unless the activities being grouped together make up an appropriate economic unit and:

a. The rental activity is insubstantial relative to the trade or business activity or vice versa, or

b. Each owner of the trade or business activity has the same proportionate ownership interest in the rental activity. If so, the rental activity portion involving the rental of property used in the trade or business activity can be grouped with the trade or business activity. See Rental activities under Grouping Your Activities in Pub. 925 for an example.

An activity involving the rental of real property with an activity involving the rental of personal property (except personal property provided in connection with the real property or vice versa).
Any activity with another activity in a different type of business and in which the corporation holds an interest as a limited partner or as a limited entrepreneur if that other activity is holding, producing, or distributing motion picture films or videotapes; farming; leasing section 1245 property; or exploring for or exploiting oil and gas resources or geothermal deposits.

grouped together by the partnership or corporation.

Partial disposition of an activity. The corporation can, for the tax year in which there is a disposition of substantially all of an activity, treat the part disposed of as a separate activity if it can prove with reasonable certainty:

The prior year unallowed losses and credits, if any, allocable to the part of the activity disposed of; and
The net income or loss and any credits for the year of disposition allocable to the disposed part of the activity.

Disclosure Requirement A corporation is required to report to the IRS certain changes to the corporation’s groupings that occur during the tax year. For more information on these disclosure requirements, see Revenue Procedure. 2010-13, 2010-4 I.R.B. 329, available at IRS.gov/irb/2010-04_IRB .

New grouping. The corporation must file a written statement with its original income tax return for the first tax year in which two or more activities are originally grouped as a single activity. The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules.

Addition to an existing grouping. The corporation must file a written statement with its original income tax return for the tax year in which the corporation adds a new activity to an existing grouping. The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing grouping. In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules.

Regrouping. The corporation must file a written statement with its original income tax return for the tax year in which the corporation regroups activities under Regulations section 1.469-4(e)(2). The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. If the corporation regroups two or more activities into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. In addition, the statement must contain an explanation of why the original grouping

was clearly inappropriate or the nature of the material change in the facts and circumstances that made the original grouping clearly inappropriate.

Reporting of pre-existing groupings re- quired only upon change. The corporation is not required to file a written statement reporting the grouping of the trade or business activities and rental activities that have been made for tax years beginning before January 25, 2010 (pre-existing groupings), until the corporation makes a change to the grouping.

Effect of failure to report. If the corporation fails to report these changes, each trade or business activity or rental activity will be treated as a separate activity. The corporation will be considered to have made a timely disclosure if it has filed all affected income tax returns consistent with the claimed grouping and makes the required disclosure on the income tax return for the year in which the corporation first discovered the failure to disclose. If the IRS first discovers the failure to disclose, however, the corporation must also have reasonable cause for not making the required disclosure.