Assuming Gerald has $50,000 income in 2018, what is his taxable income in 2018 u

Question

Assuming Gerald has $50,000 income in 2018, what is his taxable income in 2018 under at-risk rules?

Five years ago Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2016, his amount at risk in the activity was $30,000. His shares of the income and losses were as follows: Year 2016 2017 2018 Income (Loss) ($40,000) (30,000) 50,000 Gerald holds no suspended at-risk or passive activity losses at the beginning of 2016. If an answer is zero, enter "O". a. If losses were limited only by the at-risk rules, how much can Gerald deduct in 2016 and 2017? Year Loss 2016 ($40,000) 2017 ($30,000) Total Allowed Suspended 10,000 30,000 40,000 0

Explanation / Answer

Solution :

Earlier tax payers were given a tax shelter by allowing them to deduct losses that were greater than their investment in the activity.  Furthermore, most of these activities had no real economic value — their purpose was simply to allow these so-called investors to deduct more from their taxes than what they actually lost. To avoid this abuse and prevent it there are two set of rules i.e at risk rules & passive activity rules that allow a person to deduct there losses in respect of their at risk actually they had at the end of the tax year. Another limitation is that they cannot set off amount more than there cost basis business i.e there cost investment in business. Earlier there was a list of activities allowed under this such as farming, exploring or exploiting oil and gas or geothermal deposits, but then the list was revised and includes a much more general rule that simply includes any activity for the production of income. In this case the activity is not mentioned clearly. Hence we assume that it is allowable activity as per the rules specified and the at risk rule applies to it.

So it would be able to set off losses only to the extent of $30000 at risk available as on that date. further losses of 10000 balance would be carried forward at time when he will invest in the business again.

if he invests $50000 in 2018, his carried forward losses of 2016 $ 10000 & $ 30000 of 2017 would be able to set off and remaining amount of $ 10000 would be his taxable income for 2018.

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