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Passive Income

There are three main types of income; Passive, Active and Portfolio income. Passive income is a rent, income, or earning received by an individual on a recurring regular basis with little effort from the individual required to maintain it. In other words, it is the income derived by an individual from an enterprise, a rental property or a limited partnership where the individual is passively involved.

In the American International Revenue Service, passive income is defined as “any activity… in which the taxpayer does not materially participate.” Equally, some other government institutions and financial institutions view passive income as an income acquired as a result of capital growth or linked to a negative gearing.

Note that passive income doesn’t involve income from any active source or active participation or even wages or salaries, nor does it include earnings from interests, dividends or capital gains. It is also important to know that passive income is also subject to taxation, just as normal active income. But taxation is treated differently than the normal taxation. For reasons of tax, losses incurred in passive income cannot be used in anyway to offset either portfolio or active income.

Equally important to note, some financial institutions consider portfolio income as passive income, therefore making income obtained from dividends and interests passive income. It is in light to this slight confusion that may occur, especially when one has a blend of all the three types of income that it is recommended one checks with the International Revenue Service to ensure taxes are filed in the approved manner to avoid wrong taxations.

The International Revenue service gives many tax benefits to passive income. Many people today are generating passive income streams that will not only earn extra revenue but also get a positive tax treatment.

Examples of Passive Income

Passive income applies to very many settings that generate extra revenue to an individual. For instance, the most common example is rental from property and pensions. Similarly, if one publishes a book or licenses a patent or any other form of intellectual property, the royalties received can be termed as passive income.

Similarly, regular recurring income earned by a sales person, which is derived from the payment of a service or product that is subject to renewal regularly so that the seller can go on receiving the benefits can be termed as passive income. This kind of income is also commonly referred to as residual income.

If an individual receives an income from a business, whereby he or she does not get directly involved in it, and thus receives the earning from the business owner or merchant, the earnings similarly fall in the category of passive income.

Internet passive income

As technology advances by the minute, so do individuals come up with ways of raising extra revenue to meet the high costs of living. One form of passive income from the internet is the income generated when someone advertises their products or services on another’s website. The Internet trend creates real value and what is more, a lot of it is free, therefore generating maximum passive income.

Emarketing, also known as online marketing or web marketing is another online lucrative venture of making passive income. Considering the fact that the costs for online advertisements are lower, the passive income generation possibilities are manifold.

However, one disadvantage of online passive income is that individuals can use it as incentives for fraudulent online scams. Equally, online passive income generation can be misused where people may publish or self publish books with contents that contain advices or knowledge of non-levied value.

Tags: advance, check, government, Income, market, revenue, tax, Taxation

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