Question

Zhou owns a nonrental business with two separate departments. Department A generates net income of $70,000, and Department B generates a net loss of $58,000. Zhou participates 800 hours in the operations of Department A and 300 hours in the operations of Department B. If Zhou is allowed to treat the departments as components of a single activity, calculate the amount of the Department B loss that can be offset against the income from Department A in the current year.

Answer 1

Income tax:

Income tax is the tax that a person is liable to pay on the income generated during the year. It is not same for all taxpayers. It changes as per the income level. Income tax is calculated as per income slabs.

 

Passive activity loss rule:

It is a type of loss that incurred by the operation in which the taxpayer is not materially involved. According to this rule, the taxpayer cannot settle the ordinary earned income settle against this loss.

 

The taxpayer is materially involved in activities of normal operations. The taxpayer can offset the amount of loss against the amount of profit. In this case, the amount of profit is higher than the amount of loss. The taxpayer can deduct the whole amount of loss.

 

Hence, the amount of loss offset against profit is $58,000.

Hence, the amount of loss offset against profit is $58,000.