🎯Losses Limitations: 11 MCQs

Responses

1. 

   Yichun Leppala 24 March 2024

   Q9 and Q10 are saying opposite things? The amount exceed the at-risk should be suspended under at risk rule. Therefore, Q10’s answer and explanation is incorrect?

   1. 

      DG SHIN 28 March 2024

      I had a same question. In Q10 if Sindy has a other passive income of 30K, the 30K will be offset from 95K. So the rest 60K is suspended, of which 45K is from At-risk, and 15K is from PAL. Am I on the right track?

      1. 

         Maroun, CPA 29 March 2024

         Hello DG,

         Yes, you’re on the right track. Question 10 has been updated.
         Please review it and let me know if you still have any questions.
         If Sindy has a passive income of $30,000, she can use that income to offset $30,000 of her passive activity loss, leaving her with a remaining loss of $65,000. Since her at-risk amount is $45,000, she can only deduct $45,000 of the $65,000 remaining loss under the at-risk rules. The remaining $20,000 is suspended under the at-risk rules. The $45,000 loss that was allowed under the at-risk rules is suspended under the passive activity loss (PAL) rules. Thus, in this scenario, Sindy would have a suspended loss of $20,000 under the at-risk rules and a suspended loss of $45,000 under the passive activity loss rules.

         Hope this helps!

   2. 

      Maroun, CPA 29 March 2024

      Hello Yichun,

      Your reasoning is correct. Question 10 has been updated.
      Please review it and let me know if you still have any questions.

2. 

   Atheer Adell 11 July 2025

   Why would we have total suspended loss of 50000 while it less than the at risk basis ?

   1. 

      Maroun, CPA 14 July 2025

      Hello Atheer,

      When dealing with losses from pass-through entities or passive activities, there are four main limitations, applied sequentially as follows:
      1. Tax Basis Limitation
      2. At-Risk Limitation
      3. Passive Activity Loss (PAL) Limitation
      4. Excess Business Loss Limitation

      In this scenario:
      • First, we apply the at-risk limitation.
      – ABC activity had income of $90,000 and at-risk basis of $60,000. Since ABC had income, there is no at-risk limitation concern here.
      – XYZ had a loss of $140,000 and an at-risk basis of $150,000. Because the loss ($140,000) is less than the at-risk basis ($150,000), the entire loss passes this limitation without any reduction or suspension.

      • Next, after confirming there’s no limitation at the at-risk stage, we move to the passive activity loss (PAL) limitation. Passive activity loss (PAL) rules indicate that losses from passive activities can only offset income from other passive activities. Any excess losses are suspended and carried forward indefinitely until there’s passive income available.

      – Passive losses ($140,000 from XYZ) can only offset passive income ($90,000 from ABC).
      After offsetting, we’re left with an excess passive loss of $50,000 ($140,000 loss – $90,000 income), which is not currently deductible.

      This excess passive loss ($50,000) is the amount that becomes suspended as a passive loss carryforward.

      Therefore, even though there was sufficient at-risk basis, you still ended up with a suspended passive loss due to the PAL limitation.

      I hope this clarifies the reason behind the $50,000 suspended loss!

3. 

   Atheer Adell 12 July 2025

   passive activity risk amount is 45000 and same activity current loss is 95000 , we have 50,000 under the at-risk rule why we have 45000 suspended loss? why i hasn’t been deducted ?

   1. 

      Maroun, CPA 14 July 2025

      Hello Atheer,

      There are four loss limitation rules that we apply sequentially:
      1. Tax Basis Limitation
      2. At-Risk Limitation
      3. Passive Activity Loss (PAL) Limitation
      4. Excess Business Loss Limitation

      Step 1: At-Risk Limitation
      Sindy’s at-risk amount is $45,000, which is the maximum loss she can potentially deduct at this stage.
      Total loss available: $95,000
      Allowed loss under at-risk rules: $45,000
      Remaining suspended loss under at-risk rules: $50,000 ($95,000 – $45,000)

      This $50,000 loss cannot yet move forward because there’s not enough at-risk basis.

      Step 2: Passive Activity Loss (PAL) Limitation
      Now, we examine the loss allowed under the at-risk rule ($45,000) against passive activity income.

      Sindy has no other passive income. Therefore, she cannot currently deduct this $45,000 allowed loss from the first step.

      Hence, this $45,000 is suspended again under the passive activity limitation, waiting for future passive activity income.

      Final Result:
      $50,000 is suspended under the at-risk limitation.
      $45,000 is suspended under the passive activity limitation.

      The reason the $45,000 is suspended (and not deducted immediately) is precisely because Sindy has no passive activity income this year. Even though the amount cleared the at-risk hurdle, it cannot be deducted until there’s passive income against which to offset it.

      I hope this explanation clarifies exactly how and why the amounts get suspended at different stages!

4. 

   Prem Lalwani 10 April 2026

   in question 6 the correct answer, option B is chosen as correct but I think the answer could also be D as from the PAL ppt itself we can see on the material participation condition point 2 that “The taxpayer’s participation in the activity is substantially all of the participation in the activity of all individuals for the year.” and here is it seems to meet the condition as the ratio is 95:5. please advice.

   1. 

      Maroun, CPA 12 April 2026

      Hello Prem,

      You are correct. The original question was ambiguous because more than one answer could satisfy the material participation rules. We have updated the question so that only one answer is now clearly correct.

      Thanks for catching that, and keep up the great work!