Question

Maria, who owns a 50% interest in a partnership operating a restaurant, had been a material participant in the restaurant activity for each of the last 20 years. She retired from working at the restaurant at the end of last year and no longer participates in the restaurant operations in any way. She is also a 50% partner in a retail store business in whose operations she has never participated. The retail store operations produce a loss for the current year, and Maria’s share of the loss is $80,000. Her share of the income from the restaurant is $150,000. She does not own interests in any other activities and her only other source of income or loss is $15,000 in interest from bonds she owns.

a. Maria can deduct $15,000 of the loss from the retail store against the $15,000 in interest income.

b. Maria can offset the entire $80,000 loss from the retail store against the $150,000 of restaurant income.

c. Maria may not offset any of the $80,000 loss from the retail store against income of the restaurant or her interest income.

d. Assuming Maria continues to hold the interest in the restaurant, she will always treat the income or losses as active.

e. None of the above is correct.

Answer 1

Answer:

Option b is correct

Explanation:

Option A is incorrect because Maria cannot deduct the $15,000 of the loss from the retail store against the $15,000 in interest income

Option B Maria can offset the $80,000 retail store loss against the $150,000 of restaurant income is correct because Maria materially participated in the restaurant activity for at least 5 of the last 10 taxable years before the current year, she is still considered an active participant in the activity. Therefore, her loss is an active loss that can be offset against her active income from the retail store.

Option C is incorrect because Maria will be able to deduct any passive activity losses from the retail store against income of the restaurant until she has been retired and inactive in the restaurant business for at least six years.

Option D is incorrect because  assuming Maria continues to hold the interest in the restaurant, she will not be able to treat the income or losses as active.