Income and losses on a tax return are divided into two categories:
Passive: Rentals and businesses without material participation. A limited partner is generally passive due to more restrictive tests for material participation. As a result, limited partners will generally have passive income or losses from the partnership.
Non-passive: Businesses in which the taxpayer materially participates. Also, salaries, guaranteed payments, 1099 commission income and portfolio or investment income are deemed to be non-passive. Portfolio income includes interest income, dividends, royalties, gains and losses on stocks, pensions, lottery winnings, and any other property held for investment.
Rental real estate (with some exceptions)
Sole proprietorship or farm in which the taxpayer does not materially participate
Limited partnerships with some exceptions
Partnerships, S-Corporations, and limited liability companies in which the taxpayer does not materially participate
Salaries, wages, and 1099 commission income
Interest and dividends
Stocks and bonds
Sale of undeveloped land or other investment property
Royalties derived in the ordinary course of business
Sole proprietorship or farm in which the taxpayer materially participates
Partnerships, S-Corporations, and limited liability companies in which the taxpayer materially participates
Trusts in which the fiduciary materially participates