Passive losses are $250,000 in the question, and $150,000 in the explanation?? Help!
Original Fast Forward Academy test bank question:
In 2011, Panda Corp. has passive losses of $250,000 from a rental activity. Its active business income is $150,000 and its portfolio income is $50,000. What is Panda Corp.'s 2011 taxable income if a) Panda is a closely held corporation and b) Panda is a personal service corporation?
A. a) $50,000, b) $200,000
B. a) $50,000 loss, b) $200,000
C. a) $50,000, b) $50,000
D. a) $200,000, b) $50,000
Closely held corporations can offset passive losses, if any, with net active income. Net active income is the corporation's taxable income for the tax year, determined without regard to the following items.
Net passive income or loss.
This would result in taxable income of $50,000 (150,000 active income - 150,000 passive loss + 50,000 portfolio income).
Personal Service Corporations cannot offset passive losses. Therefore, none of the passive loss is deductible resulting in taxable income of $200,000 (150,000 active income + 50,000 portfolio income - 0 passive loss).
FFA EA Book Reference: CH 11 Business Taxation Subsection: Business income Subject: Gross business income Correct Answer: A
Closely held corporations can offset passive losses, if any, with net active income. In this example the CHC can use $150,000 of its passive loss as that is how much active income it has.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
Start a Tax Career
Tax Course & RTRP Exam Guide + Practice Exams
Learn more about FFA's IRS RTRP study guide and UNLIMITED Practice Exams.