Passive vs. Nonpassive Income or Loss
- Nonpassive income encompasses all cash flow received directly in relation to work completed. For example, if an employee has worked for eight hours, the income received reflects the eight hours worked. Employers often track the earned income for each employee and issue a paycheck once every week or bimonthly, based on the human resource regulations for payments or accounting cycle for the given company.
- Passive income refers to income earned from sources other than direct employment earnings. Examples include rental fees from owned property, payments for sales of products or any secondary earnings made without having an active role.
- Passive income loss refers to the expected amount of income that was not reached during a single period. According to the IRS, nonpassive income loss refers to the losses endured in material business participation. For tax purposes, it is important to note that passive income losses cannot be compared or filed under regular income losses. Passive income losses must be kept separate from other income to ensure the tax amounts are filed correctly with the IRS.
- Portfolio income is a third type of income, where earnings are used to earn additional money. It is similar to passive earnings, but the IRS requires the earnings to be filed under portfolio earnings. People who have full-time jobs use portfolio income to increase overall earnings. Examples of portfolio income include interests on various banking accounts and savings, royalties from properties and copyrighted work, dividends from owning stock and capital gains from owned assets, investment properties and mutual funds.