Problem 11-52 (Algorithmic) (LO. 2, 3, 7)

Five years ago Gerald invested $186,000 in a passive activity, his sole investment venture. On January 1, 2019, his amount at risk in the activity was $37,200. His shares of the income and losses were as follows:

Year Income (Loss)

2019 ($55,800)

2020 (37,200)

2021 57,200

Gerald holds no suspended at-risk or passive activity losses at the beginning of 2019.

If an answer is zero, enter "0".

a. If losses were limited only by the at-risk rules, how much can Gerald deduct in 2019 and 2020?

Year Loss Allowed Suspended

2019 ($55,800)

2020 ($37,200)

Total

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The at-risk provisions limit the deductibility of losses from business and income producing activities. These provisions, which apply to individuals and closely held corporations, are designed to prevent taxpayers from deducting losses in excess of their actual economic investment in an activity. The passive activity loss rules operate by requiring taxpayers to classify their income and losses into various categories. Then the rules limit the extent to which losses in the passive category can be used to offset income in the other categories.

b. Refer to the information in part (a) above. If losses were limited by the at-risk and the passive activity loss rules, how much would Gerald be able to deduct in 2019 and 2020?

Of the allowable at-risk loss for 2019, Gerald may deduct _______________ in 2019 due to the passive loss rules and of the allowable at-risk loss from 2020, Gerald may deduct ______________ in 2020 due to the passive loss rules.

c. Assuming Gerald has $57,200 income in 2021, (and considering both at-risk and passive activity loss rules), what is the amount of Gerald's suspended losses at the end of 2021?

Suspended under the at-risk rules:

Suspended under the passive activity loss rules:

What is his taxable income for 2021?

At the end of 2021, what is the amount of Gerald's adjusted basis in the activity?