Question

Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara's current year AGI is a(n)

A) decrease of $7,000
B) decrease of $13,000
C) increase of $6,000
D) $0

Answer 1

When Mara becomes a material participant, she can use the suspended passive losses to offset the current year's income, resulting in a decrease of $7,000 in her current year AGI.

Step-by-step explanation:

When Mara becomes a material participant in the activity, she can use the suspended passive losses from prior years to offset the current year's income. In this case, Mara can deduct the $6,000 income from the $13,000 suspended passive losses. This will result in a decrease of $7,000 in Mara's current year AGI.