Question

In: Accounting

Sub: Advanced Federal Taxation Why do you think we have passive activity loss rules?

Sub: Advanced Federal Taxation

Why do you think we have passive activity loss rules?

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Expert Solution

Passive Activity Loss Rules:

The passive activity is an activity where the taxpayer does not materially participate in its operations. The rent, leasing and business income with no material participation are the example of passive activities.

The passive activity loss rules refers to the set of tax rules that forbid the taxpayer to use the passive losses for offsetting the ordinary income. It restricts the taxpayer to use the losses resulting from immaterial activities (passive activities). The passive losses can only be used for offsetting the passive income. The passive activity loss rules state that the passive loss can only be used in the current year against the passive income. However, it can also be carried forward but it cannot be carried back.

Therefore, the passive activity loss rules restrict the taxpayers to use the passive losses to offset the active income. It provides the passive loss treatment in the calculation of the taxable income.

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