Since the enactment of the net investment income tax ("NIIT") in 2012, physicians and other taxpayers owning multiple business interests have had to make educated choices based upon accounting projections and SWAGS when determining how best to treat ancillary businesses for tax purposes. If an ancillary business is treated as an active trade or business or is otherwise required to be "grouped" with the physician's regular practice under the passive activity rules, the income and/or loss generated by the ancillary business will be treated as ordinary income or loss, and will not be subject to the NIIT. On the other hand, if the physician has unused passive losses from other business investments, being able to treat an ancillary business which actually produces income as a "passive" activity, produces the better income tax result by allowing the passive losses to offset that passive income. The most important decision though comes when the ancillary activity is first acquired and "grouped" with other active or passive activities since that grouping must also be used in subsequent years (absent a material change in facts and circumstances). Treas. Reg. Section 1.469-4(e).

As most physicians are aware, there are some activities which are so closely related to their day-to-day medical practice that such activities must be grouped with the medical practice under the passive activity loss rules. In fact, one of the examples in the passive loss grouping regulations involves a group of physicians who invest in a separate company providing radiological services. After describing why the radiological services are merely a change in form, but not in substance, regarding how such services were historically provided, the regulations conclude that the income from the radiological service company must be grouped with each partner physician's medical practice income for tax purposes. The fact that one of the express reasons for forming the radiological partnership was to create passive income (since all of the physicians had unused passive losses or were planning to acquire passive investments), did not help the physicians with the Service's conclusion. Treas. Reg. Section 1.469-4(f)(2).

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