Jorge owns activity X which produced a $20,000 passive loss last year.Jorge's only income last year was wages of $30,000.Jorge is a material participant in activity X this year when it produces a $14,000 loss.This year,Jorge's wages are $40,000.This year,Jorge also has passive activity income from activity Y of $16,000.What is the total passive activity loss carryover to next year?
A)$0
B)$3,000
C)$4,000
D)$18,000

Question

Quizplus · Accepted Answer

Jorge can only deduct up to $3,000 of passive losses against his non-passive income each year. 
Last year, he had $30,000 of non-passive income, so he could only deduct $3,000 of the $20,000 passive loss. This leaves him with a carryover of $17,000. 
This year, he was a material participant in activity X, so he can deduct the entire $14,000 loss against his non-passive income, leaving him with a passive loss carryover of $3,000. 
He also had passive income of $16,000, which he can offset with passive losses. However, since his passive losses are only $3,000, he can offset all of the passive income and still have a carryover of $3,000. So the total passive activity loss carryover to next year is $3,000.

Jorge Owns Activity X Which Produced a $20,000 Passive Loss