The passive activity tax rules divide income and loss into three buckets: active, passive, and portfolio. Most income tends to be active, for example, salary income and most income from businesses people run. Passive income results from either businesses that person owns part of but doesn’t materially participate in or rental businesses. Losses from passive activities cannot offset active income for tax purposes. This means that if you have active income but passive losses then your taxable income will exceed your actual income meaning that you pay a larger amount of tax than you would on your true net income.