Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. However, she continues to be a material participant in a retail store in which she is a 50% partner. The restaurant operations produce a loss for

Question

the current year, and Maria's share of the loss is $80,000 . Her share of the income from the retail store is $150,000 . She does not own interests in any other activities.
a. Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant.
b. Maria can offset the $80,000 loss against the $150,000 of income from the retail store.
c. Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years.
d. Assuming Maria continues to hold the interest in the restaurant, she will always treat the losses as active.
e. None of the above.

Answer 1

b
RATIONALE: Because Maria materially participated in the restaurant activity for at least five of the last ten taxable years before the current year (Test 5), she is still considered an active participant in the activity. Therefore, her loss is an active loss that can be offset against her active income from the retail store. However, in the future after no longer meeting the five-year test, the classification of the losses will depend on Maria's level of involvement in the restaurant activity.