Area I: Individual Compliance and Planning — CPA Practice Question 07

How to approach this question

Apply the ordering rules: (1) Basis, (2) At-Risk, (3) Passive Activity. The loss must clear each hurdle sequentially.

Full Answer

B.$30,000 is suspended under at-risk rules; $80,000 is suspended under passive activity loss rules.✓ Correct

$30,000 is suspended under at-risk rules; $80,000 is suspended under passive activity loss rules.

IRC §465 (At-Risk) applies before IRC §469 (Passive Activity). Total Loss: $110,000. At-Risk Limit: $80,000. Therefore, $30,000 is suspended under At-Risk rules. The remaining $80,000 is 'allowed' under At-Risk but is now subject to Passive Activity rules. With no passive income, the entire $80,000 is suspended as a Passive Activity Loss (PAL).

Common mistakes

Applying PAL rules to the entire loss before checking at-risk limits.

In Year 1, a taxpayer invests $100,000 in a passive activity. They have an at-risk amount of $80,000. In Year 1, the activity generates a loss of $110,000. The taxpayer has no other passive income. How is the loss treated in Year 1?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 2

More questions from this exam