Question

12-18 b. Passive Activities. G is the head chef for Hall-way Alls, lakinig a salary of $70,000 a year. In addition, his portfolio income is about $20.000 VAN the years, G has made numerous investments and has been a participant in mar ventures. Indicate whether the passive activity rules would apply in each of thi following situations: a. A $10,000 loss from G's interest in Flimsy Films, a limited partnership. G is a limited partner. A $5,000 loss from G's interest as a shareholder in D's Bar and Grill, an S corporation. G and his wife operate the bar. Each spent 300 hours working there in the current year. G and his friend, F, are equal partners in a partnership that produces and mar- kets a Texas-style barbecue sauce. G leaves the management of the day-to-day operations to F. However, G spent 130 hours working in the business during the current year. For the year, the partnership had income of $15,000. Assume that this is G's only investment. Same as (c) except G has an ownership interest in three other distinctly differ- ent activities (e.g., construction and consulting). He spends 130 hours in each of the four activities. d. G is a 10% partner in a restaurant consulting firm. The firm operates the busi- ness on the bottom floor of a three-story building it owns. The firm leases the other two floors to a law firm and a real estate company. The consulting side of the business reported a $100,000 profit from consulting, $5,000 in interest income, and had a loss from the rental operation. f. G is the sole owner of Try, Inc., a regular C corporation that produces o special salad dressing. The corporation had an operating profit of $4,000. 1 addition, Try, Inc. had interest income of $5,000 and a $7,000 loss from its investment in a real estate limited partnership in which it was a limited partner 12 10 Dae Activi tati...

Answer 1

• Passive activity loss rules are a set of IRS rules stating that passive losses can be used only to offset passive income.
• A passive activity is one wherein the taxpayer did not materially participate in its ongoing operation during the year in question.
• Common passive activity losses may stem from leasing equipment, real estate rentals, or limited partnerships.

1)    NO , Mr. G cant use the loss of his interests in the partnership firm as he is a LIMITED PARTNER, which means that he is materially i.e actively involved in the process and the passive activity rules doesnt allow the same

2)    YES, as they both have spent 300 hrs working and the most common working hrs to be considered as active is 500hrs

3)    YES, same reason as above

4)   NO , as he spends 130hrs in each activity which formulates to 520hrs in total

5)   YES , rule no.3 applies

6)   YES, same as above