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?

Answer options:

$110,000 is suspended under passive activity loss rules.

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

$30,000 is suspended under at-risk rules; $80,000 is deductible against active income.

$10,000 is suspended under basis rules; $20,000 under at-risk rules; $80,000 under passive rules.

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

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.

Question 06 All questions Question 08

Practice the full CPA TCP Practice Exam 2

68 questions · hints · full answers · grading

More questions from this exam

Q01In Year 1, an executive receives an Incentive Stock Option (ISO) to purchase 1,000 shares of stoc...Medium Q02A taxpayer is calculating their Alternative Minimum Tax (AMT) liability for Year 1. They claimed ...Medium Q03On January 1, Year 1, a corporation lends $500,000 to a shareholder at a 0% interest rate. The Ap...Hard Q04A U.S. citizen accepts a permanent assignment in France on January 1, Year 1. In Year 1, they ear...Medium Q05A 12-year-old child has $5,000 of interest income and no earned income in Year 1. The standard de...Medium

View all 68 questions →