Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss.Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie.During this year,activity B produces a $9,000 loss.In addition,Charlie acquires an investment in activity X,a passive activity,this year.Charlie's share of activity X's income is $13,000.Charlie's salary this year is $70,000.As a result,this year Charlie must
A)offset B's loss carryover against X's current income and carry over $9,000 loss from activity B to next year.
B)offset B's carryover loss and current loss against X's income first and then offset any remaining loss against salary.
C)offset B's $9,000 loss against X's $13,000 income and offset B's loss carryover against the remaining $4,000 of X's income.
D)offset B's current $9,000 loss against his salary and offset B's loss carryover against X's income and carry over $4,000 of loss to next year.

Question

Quizplus · Accepted Answer

Since Charlie increased his involvement with activity B, it is not considered passive anymore. Therefore, the suspended loss from the previous year can now be used to offset his salary income. So, Charlie can offset the $17,000 suspended loss against his $70,000 salary income, leaving him with $53,000 taxable income from salary. 
Next, Charlie can offset the $9,000 loss from activity B against his remaining taxable income from salary, resulting in $44,000 taxable income from salary. 
Finally, Charlie can offset his $13,000 income from activity X against the remaining $13,000 of his taxable income from salary, resulting in $31,000 taxable income. Therefore, Charlie can carry over the remaining $4,000 loss from activity B to the next year.

Charlie Owns Activity B Which Was Considered a Passive Activity