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.

Question

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Charles may choose to treat the two departments as either a single activity or as separate activities.If the two departments are treated as a single activity,Charles is a material participant and the loss can be offset against the income.If the two departments are treated as separate activities,Charles is a material participant with respect to Department A (the more-than-500-hour test is met)and the income from Department A is active.However,the loss from Department B would be passive because none of the material participation tests would be met.Passive losses cannot be offset against active income.

Charles Owns a Business with Two Separate Departments