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EXAMPLE 1- TAXPAYER HAS 3 PASSIVE ACTIVITIES WITH THE FOLLOWING RESULTS FOR THE CURRENT YEAR(YEAR 1):...

EXAMPLE 1- TAXPAYER HAS 3 PASSIVE ACTIVITIES WITH THE FOLLOWING RESULTS FOR THE CURRENT YEAR(YEAR 1): ACTIVITY A ($10,000), ACTIVITY B ($15,000), AND ACTIVITY C $6,000TAXPAYER CAN DEDUCT ONLY $6,000 OF THE PASSIVE LOSSES SINCE PASSIVE LOSSES ARE DEDUCTIBLE ONLY UP TO PASSIVE INCOME WITH THE FOLLOWING LOSS CARRYFORWARDS TO YEAR 2: $19,000 DISALLOWED LOSSES X 10/25= ($7,600) LOSS CARRIED FORWARD FROM ACITIVITY A $19,000 DISALLOWED LOSSES X 15/25= ($11,400) LOSS CARRIED FORWARD FROM ACTIVITY B

can someone explain this please

Solutions

Expert Solution

Activity A        -10,000
Activity B        -15,000
Activity C            6,000
As per law, passive activity loss can be adjusted with passive activity income only, hence in year 1 only 6,000 activity loss can be adjusted with passive income of Activity C of 6,000 & the remaining loss of $ 19,000 ( 25,000 - 6,000 ) will be carried forward to next year .
Now, the loss carried forward of $ 19,000 will be allocated to Activity A & Activity B in ratio of their losses, assuming that $ 6,000 income of activity C has been adjusted proportionately from Activity A & Activity B loss.
Disallowed loss of activity A        7,600 ( 19,000 x 10,000 ) / 25,000
Disallowed loss of activity B      11,400 ( 19,000 x 15,000 ) / 25,000
Alternatively, it can explained as:
Loss of Activity A adjusted with Income of activity C        2,400 ( 6,000 x 10,000 ) / 25,000
Loss of Activity B adjusted with Income of activity C        3,600 ( 6,000 x 15,000 ) / 25,000
Disallowed loss of activity A        7,600 (10,000 - 2,400 )
Disallowed loss of activity B      11,400 ( 15,000 - 3,600 )

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