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The Honest Definition of Passive Income

by | Oct 18, 2018 | Business

6 min read

So what’s the real definition of passive income?

I myself have been guilty of using the term incorrectly.

Even on my blog I’ll still say passive income like selling on Amazon is passive income, or blogging is passive income.

Obviously it’s not because you have to work for it, and it’s not completely passive, so to speak.

So where do we draw the line?

 

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To answer that question, we first need to consider the laws, and then ask ourselves what we consider ‘passive’ in context.

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The Technical Definition of “Passive Income”

When you get out the dusty law books of the IRS definitions of income, you see three types: active, passive and portfolio. Active is when you are working actively to obtain the income, while portfolio income is income earned from investments and dividends.

According to the IRS, the term passive income states that business activities where you do not materially participate are considered passive income, such as rental properties.

If you ask me, that’s quite the outdated definition of passive income. There’s so many ways that you can get passive income now without owning a rental property. But if you’re looking for a break on your taxes, and own a rental property, be sure to include the ‘true’ definition in your taxes to get the benefits of that.

Getting away from the dusty law books, what is the up-to-date version of passive income with the plethora of internet jobs and unique side-hustle ventures?

 

The Relaxed Definition of “Passive Income”

Since we’re not all ones to follow the law to the utmost degree, it’s arguable that we can say that our own, down-to-earth definition of passive income could mean any job in where you build your business to the point of stepping away from it using outsourcing and employees with minimal maintenance. 

Passive income typically means that it’s a business activity in which you don’t actively participate.

Could we call this – automated?

Say we wrote an ebook and published it online, is that considered passive income?
We do the work up front to write and publish the book, and then get residual income for years to come – isn’t that considered passive income?

I’d like to think so.

Some posts that will help you determine ways to create passive income in your business are here:

How to Create Organized Business Systems Like A Boss – Learn how to create systems which gives you the ability to step away, gaining passive income in your business.

5 Ways to Explode Your Business Growth on Autopilot! – Passive income, here we come with these strategies!

The Ultimate Guide to Starting Your Online Business – Online Business 101, all in one post!

 

So What’s the Real Definition of “Passive Income”?

In today’s online world, it’s hard to determine what the real proper definition of passive income could be.

Whether you’re black and white, or have some grays in between, I think it’s safe to say that passive income can come in many different forms with all the new types of ways to make money online nowadays.

After all – to make any money at all, we need to have some time and effort to work, which, by technical definition means that it’s not passive. But front loading that work and then getting paid later, or multiple times in the future, could still equivocally describe passive income as well.

Or maybe, we need a new definition to describe today’s passive income, because if we go by the IRS definition, a rental property still needs a lot of maintenance.

And working up front in a startup company, or starting a blog, or writing an ebook with upfront work first and recurring income after still makes you money with less time involved in the long run.

I’d like to argue that any business idea requires extra work to maintain, even if it’s completely outsourced. This should mean it’s not completely passive. But, it is.

The only difference is that we are putting most of the work up front, and then retaining residual income after the business idea is built and sustaining itself, while you can step away.

Maybe that’s the new definition of passive income for todays world.

So we have a choice here:

Choose the black and white side: the technical and legal definition of passive income means we have completely hands off work at all times, and only applies to rental properties and “trade or business activities in which you do not materially participate”. But again, rental properties require maintenance, too.

Or choose the gray scale side: various types of business ideas require various types of time, money and work up front, while being able to step away after a time, and minimal maintenance.

I’m sure many years down the road the IRS will catch up and eventually change their dusty law books – but for now, the entrepreneurs and investors who are living it in today’s world can safely say that any income where you can make money without directly working at all times can be a good way to build wealth and prosperity for years to come.

 

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What is Passive Income? The definition of passive income puzzles many, and I outline it all in this post. It might not be what you think! - The Success Mountain
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