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: 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:  Which of the following answers is correct?

Quizplus · Accepted Answer

Statement 1 is true because Green Corporation has a taxable income of $20,000 ($50,000 active income - $70,000 passive loss), which means it is subject to income tax.

Statement 2 is also true because dividends received by Green Corporation are considered passive income and are thus subject to the passive activity loss (PAL) rules. PALs can only be used to offset passive income, so the $40,000 in dividends received cannot be used to offset the $70,000 passive loss.

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