What is the effect of prior year unallowed losses on current year passive activity losses?

Prior year unallowed losses from passive activities have a specific treatment under tax law. When dealing with passive activity losses, if the losses for a prior year were not allowed because they exceeded the income from passive activities, these unallowed losses can indeed be carried forward into the current year and added to the current year passive activity losses.

This means that when calculating the total passive activity losses for the current year, one would include both the current year's losses and any unallowed losses from prior years. This carryover can potentially provide a larger deduction in the current year, especially if there is sufficient passive income to absorb the total losses. Thus, the answer reflects the way passive activity losses work in conjunction with previous years' unallowed losses, allowing taxpayers to eventually utilize these losses against future passive income when available.