You see many people talking about the benefits of passive income. Do something once and sit back and do the rest of your life. Sounds great! It is said that passive-income is simply money that is received online with little to no effort to save it. income. This is the exact legal definition of what is passive income. I am not an attorney or a tax professional. So use what I write here at your own risk now days returns to CYA.
The Internal Revenue Service (IRS) defines passive income as “the activities of a trade or business in which you do not participate materially” (1). It is important to know the IRS definition of “passive income” because many types of activities that are considered passive are not according to the IRS (2). You can be harassed if you report something passive when it isn’t. And passive income to be reported to tax case. So make sure you keep it accurate.
According to the IRS there are only two sources for passive income. The first is the rent action (2). This category includes real-estate rental activities (except in a particular property) and all other rental activities (even if the property is a partner active) (I). The second source is a business in which the taxpayer does not materially participate (2). This usually means that you are a non-participating partner in the business. That is. Because you can make money without working hard, it doesn’t automatically create passive income (2).
Some examples of activities that are not passive income streams (according to the IRS) are:
- Royalties from books, patents, or other intellectual property
- Make money from advertising on your blog or website
- Anything about stocks, bonds, or other types of collateral
- Pensions or retirement income
- Commissions and frequent sales
These are just a few of the activities that are considered “non-passive”. In fact, most earned activities are considered “non-passive” activities by the IRS.
What does this mean for him to trust us? It means that many of us will have little or no passive income in our financial plans. You’ll want to think carefully about receiving opportunities for passive income unless you want to own a rental property, own a business where you sell your property, or run a business of some sort. Be aware that all three of these options carry substantial financial, time, and liability risks.
Many people use passive income and residual income on a recurring basis. I think this is a bad idea and can lead to confusion and poor judgment. What most of us require are residual income streams. We look for activities where we can put in the work once and then get money from that activity over time with minimal additional effort. In my article “What is residual income?” I cover what residual income is, some types of residual income, and why residual income is important to any financial security plan.
Resources
(1) Internal Revenue Service (http://www.irs.gov/taxtopics/tc425.html)
(2) Internal Revenue Service (http://www.irs.gov/businesses/small/article/0,,id=146330, 00.html)
