Charlie Owns Activity B Which Was Considered a Passive Activity

question 1997

Multiple Choice

Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss. Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie. During this year, activity B produces a $9,000 loss. In addition, Charlie acquires an investment in activity X, a passive activity, this year. Charlie's share of activity X's income is $13,000. Charlie's salary this year is $70,000. As a result, this year Charlie must

• A) offset B's carryover loss and current loss against X's income first and then offset any remaining loss against salary.
• B) offset B's $9,000 loss against X's $13,000 income and offset B's loss carryover against the remaining $4,000 of X's income.
• C) offset B's current $9,000 loss against his salary and offset B's loss carryover against X's income and carry over $4,000 of loss to next year.
• D) offset B's loss carryover against X's current income and carry over $9,000 loss from activity B to next year.

---

Definitions:

Present Value

The present-day value of a sum of money to be received in the future or a series of future cash flows, based on a certain return rate.

Cash Flow

A financial measurement that shows the net amount of cash and cash-equivalents being transferred into and out of a business over a specified period.

Annuity

A finite series of equal payments at equal intervals of time. In an ordinary annuity the payments occur at the ends of the time periods. In an annuity due, they occur at the beginnings.

Discounted Value

The present value of a future amount of money or a series of cash flows, adjusted for time value of money.