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Practice CPA®CPA TCP Practice Exam 2Question 59

Medium1 markMultiple Choice

Area I: Individual Compliance and PlanningTCPIndividual TaxAt-Risk

CPA · Question 59 · Area I: Individual Compliance and Planning

A taxpayer has a $100,000 loss from a business activity. They materially participate in the activity. Their 'at-risk' amount is $40,000. How much loss is deductible?

Answer options:

A.

$100,000

B.

$40,000

C.

$0

D.

$60,000

How to approach this question

Ordering: 1. At-Risk Limit ($40k). 2. Passive Limit (N/A due to material participation). Result: $40k deductible.

Full Answer

B.$40,000✓ Correct

$40,000

IRC §465. Losses are limited to the amount the taxpayer has 'at risk' in the activity. The excess ($60,000) is suspended and carried forward.

Common mistakes

Ignoring at-risk rules because the activity is 'active' (material participation). At-risk applies to active businesses too.

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