Question

3-2 OFL DC has the following income (loss) for Years 1 and 2: Year 1 General...

3-2 OFL

DC has the following income (loss) for Years 1 and 2:

Year 1

General Limitation Income:

$100 US Source

($100 Foreign Source)

Passive Income:

$30 US Source

$10 Foreign Source

Year 2

General Limitation Income:

$100 US Source

$60 Foreign Source

Passive Income:

$10 US Source

$10 Foreign Source

What is DC's income for both years and what source (US or foreign) is the income? How do you account for the loss?

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Answer #1

General category income is the income that a business earns from its core activities (be it foreign or domestic source). For eg, a Income of a Shoe maker company by selling shoes in the home country as well as income from exports is considered as Operating income.

Passive income includes Interest, Dividends, Rents, Royalties, Gains from sale and exchange, Income inclusions relating to passive foreign investment companies (PFIC), which are qualifying electing funds (QEFs). Basically not related to the core business activity of the firm.

Operating Income Total Income
year General General + Passive
1 100-100= 0 0+30+10= 40
2 100+60= 160 160+10+10= 180

Loss in 1st yr in general limitation category is basically adjusted in the operating loss only (conditions what type of foreign income is it)

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