During the year, Aimee reports $30,000 of active business income, $15,000 of income from passive activity X, and a $25,000 loss from passive activity Y. Determine the tax consequences of these events.
I.The $15,000 income from activity X can offset $15,000 of the loss from activity Y.
II.Any passive loss that is not deducted in the current year is suspended.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

During the year, Aimee reports $30,000 of active business income, $15,000 of income from passive activity X, and a $25,000 loss from passive activity Y. Determine the tax consequences of these events.
I.The $15,000 income from activity X can offset $15,000 of the loss from activity Y.
II.Any passive loss that is not deducted in the current year is suspended.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Statement I is correct because according to the passive activity loss rules, income from one passive activity can offset losses from another passive activity. In this case, the $15,000 income from activity X can offset $15,000 of the loss from activity Y.

Statement II is also correct because any passive loss that is not deducted in the current year is suspended and carried forward to future years. This means that the $10,000 remaining loss from activity Y (after offsetting $15,000 with income from activity X) will be carried forward to future years and can be used to offset future passive income or be deducted when the passive activity is sold or otherwise disposed of.

During the Year, Aimee Reports $30,000 of Active Business Income