J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

10.5 Classifying Business Activities as One or Several

If you are in more than one activity, determining aggregate or separate treatment is important for:

Deducting suspended losses when you dispose of an activity. If the activity is considered separate from the others, you may deduct a suspended loss incurred from that activity when you dispose of it. If it is not separate from the others, the suspended loss is deductible only if you dispose of substantially all of your investment (10.13).

Applying the material participation rules (10.6). If activities are separate and apart from each other, the material participation tests are applied to each activity separately. If the activities are aggregated as one activity, material participation in one activity applies to all.

Determining if you meet the 10% interest requirement for active participation (10.2).

Grouping activities together.

You may use any reasonable method under the facts and circumstances of your situation to determine if several business activities should be grouped together or treated separately. To be grouped together, the IRS says that the activities should be “an appropriate economic unit” for measuring gain or loss. For making this determination, the IRS sets these general guidelines: (1) similarities and differences in types of business; (2) the extent of common control; (3) geographic location; (4) the extent of common ownership; and (5) interdependencies among the activities. Interdependency is measured ...