Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year.In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago.Consider the following two statements:
(1) Green's current deduction for passive activity losses is $50,000 if it is a closely held C
Corporation that is not a personal service corporation.
(2) Green's current deduction for passive activity losses is $0 if it is a personal service corporation.Which of the following answers is correct?

Question

Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year.In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago.Consider the following two statements: 
(1) Green's current deduction for passive activity losses is $50,000 if it is a closely held C
Corporation that is not a personal service corporation.
(2) Green's current deduction for passive activity losses is $0 if it is a personal service corporation.Which of the following answers is correct?

Quizplus · Accepted Answer

Closely held C Corporations that are not personal service corporations can use passive activity losses to offset active income, up to the amount of their active income, which in this case is $50,000. Personal service corporations, however, are not allowed to use passive activity losses to offset any type of income, resulting in a $0 current deduction for passive activity losses.

Green Corporation Earns Active Income of $50,000 and Receives $40,000