What is the first step to determine allowable losses for a taxpayer with multiple passive activities?

The initial step in determining allowable losses for a taxpayer with multiple passive activities involves calculating the income or loss from each separate activity in the usual manner. This step is essential because it establishes a clear understanding of the financial performance of each passive activity before any aggregation or adjustments for allowable losses can be made. By individually assessing each activity, the taxpayer can identify any gains or losses, which provides a foundation for subsequent calculations related to passive losses.

Once each activity has been evaluated, the total income or loss can be calculated, allowing the taxpayer to determine the overall impact of these activities on their tax return. This process is important because passive activity loss rules require a thorough understanding of the performance of each activity to ensure accurate tax treatment, particularly when it comes to limitations on passive loss claims against non-passive income sources.

In this context, the other choices involve computations or allocations of losses that would occur after establishing the individual activity results. Therefore, understanding and determining the income or loss from each separate activity is critical as it sets the stage for any further calculations regarding allowable losses from rental real estate activities or other passive activities.