What term describes the situation when passive activity losses exceed passive activity income?

The term that describes the situation when passive activity losses exceed passive activity income is known as Passive Activity Loss (PAL). This concept is crucial for understanding how passive activities, such as rental properties or limited partnerships, are treated for tax purposes.

In the context of tax regulations, passive activity losses occur when the expenses related to a passive activity surpass the income generated from the same activity. When a taxpayer experiences this situation, it results in a net passive loss, which can generally only offset passive income. If passive losses exceed income, the taxpayer cannot deduct these losses against non-passive income, such as wages or business income, unless specific criteria are met.

Understanding Passive Activity Loss is important for tax planning and reporting as it helps taxpayers navigate the limitations on deductions and the rules governing the treatment of losses from passive activities over time. This term is foundational to ensuring compliance with tax laws related to passive income and losses.