Question

Jenny spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that she owns at a resort community. She also owns a music store in another city that is operated by a full-time employee. Jenny spends 140 hours per year working at the music store. She elects not to group them together as a single activity under the "appropriate economic unit" standard.

a.Only the bicycle rental store is a passive activity.
b.Both stores are passive activities.
c.Neither store is a passive activity.
d.Only the music store is a passive activity.
e.None of these choices are correct.

Answer 1

Please find the detailed answer as follows:

Step-by-step explanation:

Passive Activity

Passive activity is an activity in which taxpayer did not materially participate in the tax year. There are two types of passive activities. Passive activities can be rental activities and trade and business activities, in which taxpayer did not actively contribute.

Material Participation test:

1. If taxpayer participation is more than 500 hours.

2. If taxpayer does substantially all the work in the activity.

3. If the taxpayer works for more than 100 hours in the activity during the year and no one else works more than the taxpayer.

4.The activity is a significant participation activity and the sum of all significant participation activities in which taxpayer works for 100 to 500 hours, is more than 500 hours for the year.

5. if taxpayer participate materially in the activity in any five year of the previous 10 years.

6. The activity is a personal service activity and the taxpayer materially participate in the activity.

In the given case, operating a bicycle rental store is not a passive activity as Jenny actively participate in the activity and spend 1600 hours per year to operate bicycle rental store, which is more than 500 hours per year. Thus it is an active business.

Operating a music store is also not a passive activity as Jenny spends more than 100 hours in the music store, which make it a significant participation activity.

And total participation is both the significant participation activities is more than 500 hour thus non of the activity will be treated as passive.