What passive loss would investors claim for a $200 distribution and a $500 business loss per unit?

The situation presented refers to the concept of passive activity losses in relation to passive income, specifically in the case of limited partnerships or other investments where passive activity is a key factor.

When investors experience a business loss from a passive activity, they can use that loss to offset any passive income they receive from the same or other passive activities. In this case, with a $200 distribution of passive income but a $500 business loss, the main focus is on how the passive loss is treated.

The correct answer reflects that the investor would claim a $500 passive loss. This means that while they received a $200 distribution, the actual loss they can recognize is the total business loss of $500. This loss can potentially offset future passive income, as passive losses can only be deducted from passive income, and cannot be used against ordinary income unless the investor disposes of the entire interest in the passive activity.

Understanding the implications of passive losses is crucial in taxation, especially since the tax code does allow some flexibility in using these losses but with certain limitations. In this case, the investors would report the entire business loss of $500 as it is treated under passive loss rules, making the first choice the only correct reflection of their passive loss situation.