Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.
A) If Charles elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income.
B) Charles may not treat Department A and Department B as separate activities because they are parts of one business.
C) If Charles elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income.
D) If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income.
E) None of the above.

Question

Quizplus · Accepted Answer

If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income. This is because they are both part of the same business, and Charles's participation in both departments qualifies him for the active participation rules, which allow him to offset losses from one activity against income from another activity. Therefore, D is the correct answer.

Charles Owns a Business with Two Separate Departments