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
When the explanation says 150,000 passive loss, it is referring to the amount of passive loss the corporation can deduct (it's not erroneously changing the total passive loss the corporation was said to have incurred). Closely held corporations can't deduct passive losses in excess of its active income. In this case, active income is 150,000, so the corporation can deduct 150,000 of passive losses. The remaining passive loss of 100,000 (250,000 total - 150,000 currently deductible) is not deductible for the year in quesiton.
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.
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