What is the first step in determining allowable losses for a taxpayer with multiple passive activities?

To assess allowable losses for a taxpayer engaged in multiple passive activities, the correct first step is to determine the income or loss from each separate activity. This is essential because the IRS treats each passive activity as a distinct entity, and understanding the performance of each activity is crucial before making any calculations regarding allowable losses. By examining the income and losses of each activity, the taxpayer can better understand which activities generate net income and which result in losses.

Once this foundational step is completed, the taxpayer can then approximately analyze how to offset losses against other passive income or evaluate limitations based on participation levels. Each activity's financial results will inform the appropriate calculations for allowable losses, such as those related to rental real estate activities, but the overall analysis begins with assessing the individual performance of all passive activities involved.