This article consists of three parts: (1) an overview of the definition of an activity, (2) planning considerations, and (3) a summary of amendments to the first set of PAL Regulations. First, the overview section explains that a separate activity is an undertaking that consists of income-producing operations at a single location that are either predominantly rental operations or predominantly trade or business operations. Second, the overview discusses the aggregation and fragmentation rules for rental activities and trade or business activities. The Regulations provide detailed rules only for aggregating separate rental real estate activities into a single activity or for fragmenting a separate or an aggregated rental real estate activity and treating it as a separate activity. Separate trade or business activities controlled by the same interests must be aggregated into a single trade or business activity if they are similar or economically integrated. However, taxpayers may elect to fragment a trade or business activity from an aggregated activity and treat it as a separate activity. Third, the overview discusses special rules for professional service undertakings, oil and gas undertakings, the activities of a consolidated group, and publicly traded partnerships.

The planning section discusses two general strategies for enhancing taxpayer wealth in light of the second set of PAL Regulations. One strategy is to create passive activity income so that non-cash PALs can be utilized. Another strategy is to create active activity losses so that they can be used to offset cash income. The planning section also points out a potential planning pitfall that may arise from equating the minimization of tax liability with the enhancement of taxpayer wealth.

Generally, the amendments section focuses on rules that were problematic under the first set of PAL Regulations. Technical corrections are ignored.

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