Grace acquired an activity four years ago. The loss from the activity is $50,000 in the current year (at-risk basis of $40,000 as of the beginning of the year). Without considering the loss from the activity, she has gross income of $140,000. If the activity is a convenience store and Grace is a material participant, what is the effect of the activity on her taxable income

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Business

Maximo Collins

8 February, 02:31

Grace acquired an activity four years ago. The loss from the activity is $50,000 in the current year (at-risk basis of $40,000 as of the beginning of the year). Without considering the loss from the activity, she has gross income of $140,000. If the activity is a convenience store and Grace is a material participant, what is the effect of the activity on her taxable income

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Elisabeth Donovan · Answer 1

Grace taxable income during the year = $100,000

Explanation:

Given:

Current year loss = $50,000

The beginning of the year = $40000 (At risk basis)

Gross income during the year = $140,000

Grace taxable income during the year = ?

Computation of Grace taxable income during the year:

Grace taxable income during the year = Gross income during the year - Deductible beginning loss during the year

Grace taxable income during the year = $140,000 - $40,000

Grace taxable income during the year = $100,000

Therefore, her taxable income reduced from $140,000 to $100,000