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Passive Activiy Rules

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Ray owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Ray participates for 550 hours in Department A and 100 hours in
Department B. He has full-time employees in both departments. Which of the following statements is correct?
a. If Ray elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income.
b. If Ray elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income.
c. If Ray elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income.
d. None of the above.

Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?
a. The similarities and differences in types of business.
b. The extent of common control.
c. The extent of common ownership.
d. The geographic location.
e. All of the above.

Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?
a. The interdependencies between the activities.
b. The extent of common control.
c. The extent of common ownership.
d. The geographical location.
e. All of the above are relevant factors.

Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year. He has one employee who works part-time in the business. Which of the following statements is correct?
a. If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant.
b. If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant.
c. If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant.
d. If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant.
e. None of the above.

Lew owns five activities, and he elects not to group them together as a single activity under the "appropriate economic unit" standard. During the year, he participates for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, 110 hours in Activity D, and 100 hours in Activity E. Which of the following statements is correct?
a. Activities A, B, C, D, and E are all significant participation activities.
b. Lew is a material participant in Activities A, B, C, and D only.
c. Lew is a material participant in Activities A, B, C, D, and E.
d. None of the above.

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Solution Summary

This solution is in question and answer format and covers the Passive Activity Rules for individual income taxpayers.

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1.Ray may group the activities together as one activity and offset the loss and income that gives answer A. Answer B is incorrect because if the activities are two separate activities the loss will ...

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