What constitutes "passive income" under IRS rules?

• A. Income derived from wages and salaries
• B. Income derived from rental activities or business activities in which the taxpayer does not materially participate
• C. Interest income from bank accounts
• D. Income earned from actively managing a business

Answer: (B)

Passive income is defined under IRS rules as income generated from activities in which the taxpayer does not materially participate. This includes income from rental properties and partnerships where the taxpayer has limited involvement in managing or operating the business. The IRS categorizes passive income in this way to distinguish it from active income, which encompasses wages and salaries earned through direct participation in work.

In contrast, income derived from wages and salaries is considered active income because it arises from direct labor and involvement. Interest income from bank accounts does not fall under passive income because it is generated from investments rather than participatory activities. Lastly, any income earned from actively managing a business is also classified as active income due to the taxpayer's significant involvement in the operational aspects of the business. Thus, the definition aligns with IRS guidelines, accurately representing the notion of passive income.