Question 1

In 2018, Joanne invested $90,000 for a 20% interest in a limited liability company LLC) in which she is a material participant. The LLC reported losses of $340,000 in 2018 and $180,000 in 2019. Joanne's share of the LLC's losses was $68,000 in 2018 and $36,000 in 2019. How much of these losses can Joanne deduct?

Accepted Answer

The answer of In 2018, Joanne invested $90,000 for a...

Question 2

Joyce, an architect, earns $100,000 from her practice in the current year. In addition, she receives $35,000 in dividends, capital gains, and annuity income during the year. Further, she incurs a loss of $35,000 from an investment in a passive activity. Joyce's AGI for the year after considering the passive investment is $100,000.

Accepted Answer

The answer of Joyce, an architect, earns $100,000 from her...

Question 3

White Corporation, a closely held personal service corporation, has $150,000 of passive activity losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive activity loss can White Corporation deduct?

Accepted Answer

For closely held personal service corporations, passive activity losses cannot be deducted against active business income or portfolio income. Therefore, White Corporation cannot deduct any of the $150,000 passive activity losses.

Question 4

Gloria owns and works fulltime at a shop that rents watercraft of various types to tourists who are vacationing at the beach. If she generates a loss from that activity, the loss is subject to the passive activity loss rules because it is rental property.

Accepted Answer

The loss from the activity is not subject to the passive activity loss rules because Gloria materially participates in the business, making it a non-passive activity despite it involving rental property.

Question 5

In 2018, Wang invests $80,000 for a 20% interest in a partnership in which he is a material participant. The partnership incurs a loss with $100,000 being Wang's share. Which of the following statements is incorrect?

Accepted Answer

The answer of In 2018, Wang invests $80,000 for a...

Question 6

Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year. He incurred other investment expenses of $7,000 during the year. Jared may deduct $14,000 of investment interest in the current year.

Accepted Answer

The maximum amount of investment interest expense that can be deducted in a given year is equal to the investment income earned during that year. In this case, Jared earned $22,000 in investment income and can deduct up to $14,000 of investment interest expense, which is less than his investment income. Additionally, he can also deduct the $7,000 in other investment expenses for a total of $21,000 in investment deductions.

Question 7

In the current year, Louise invests $50,000 for a 20% interest in a passive activity. Her share of the loss this year is
$10,000. If this is her only passive activity, the $10,000 loss from the activity this year is suspended for use in a future year.

Accepted Answer

This is true according to the passive activity loss rules. If this is Louise's only passive activity, she cannot deduct the $10,000 loss in the current year and it will be suspended and carried forward to a future year.

Question 8

This year Seth had investment income of $31,000, investment expenses of $28,000, and a long-term capital gain of
$8,000 on an investment. In calculating his net investment income for the current year, Seth may deduct a maximum of $11,000 investment interest.

Accepted Answer

The deduction limit for investment interest is calculated as the amount of investment income minus investment expenses, so in this case Seth can deduct up to $3,000 ($31,000 - $28,000) of his investment interest. Therefore, the statement is true.

Question 9

Josh has investments in two passive activities. Activity A acquired three years ago) produces income of $30,000 this year, while Activity B acquired two years ago) produces a loss of $50,000. What is the amount of Josh's suspended loss for the year?

Accepted Answer

When an investor has a loss from a passive activity, it can only be used to offset income from another passive activity. If the investor has no other passive income in the current year, the loss must be suspended and carried forward to future years.

In this case, Activity A has produced income of $30,000, while Activity B has produced a loss of $50,000. The income from Activity A can be used to offset part of the loss from Activity B, leaving a suspended loss of $20,000.

Therefore, the amount of Josh's suspended loss for the year is $20,000. Choice C is the correct answer.

Question 10

Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to this property total $45,000. The total gain and the taxable gain are:

Accepted Answer

The total gain is the selling price ($105,000) minus the adjusted basis ($45,000), which equals $60,000. 
The taxable gain is the total gain minus the suspended losses, which equals $60,000 - $45,000 = $15,000. Therefore, the correct answer is D.

Question 11

Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away.

Accepted Answer

The answer of Tara owns a shoe store and a...

Question 12

Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.

Accepted Answer

If Charles elects to treat both departments as a single activity and meets the material participation requirements, he can offset the $60,000 loss from Department B against the $100,000 income from Department A. Material participation requires that Charles participates for more than 500 hours in the single activity, and he has participated for a total of 650 hours in this case.

Question 13

Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year. In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago. Consider the following two statements: 1) Green's current deduction for passive activity losses is $50,000 if it is a closely held C corporation that is not a personal service corporation.
2) Green's current deduction for passive activity losses is $0 if it is a personal service corporation.
Which of the following answers is correct?

Accepted Answer

The answer of Green Corporation earns active income of $50,000...

Question 14

Last year, Ted invested $100,000 for a 50% interest in a partnership in which he was a material participant. The partnership incurred a loss, and Ted's share was $150,000. Which of the following statements is incorrect?

Accepted Answer

The answer of Last year, Ted invested $100,000 for a...

Question 15

Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?

Accepted Answer

All of the factors listed should be considered when determining whether an activity is an appropriate economic unit. Similarities and differences in types of business can affect the extent to which they can be considered part of the same economic unit. Common control and ownership can also have an impact on the unity of the activities. Geographic location is important because it can affect the level of integration and interdependence between activities. Therefore, all of the above factors should be taken into account when deciding whether the activities should be treated as a single economic unit for tax purposes.

Question 16

Jennifer gave her interest in a passive activity fair market value of $75,000 and basis of $60,000) to Harrison. Associated with the interest is a suspended passive activity loss of $8,000. Upon making the gift, the suspended passive activity loss is not deductible to Jennifer, but it will benefit Harrison.

Accepted Answer

When a passive activity interest is transferred, any suspended passive activity losses associated with it are also transferred. The new owner of the interest may be able to deduct the suspended losses against passive activity income in the future. However, the previous owner cannot deduct the losses upon transfer.

Question 17

Kathy, who qualifies as a real estate professional, owns an apartment building and devotes 550 hours to managing the activity. All losses from the rental activity will be considered nonpassive and deductible against active income.

Accepted Answer

The answer of Kathy, who qualifies as a real estate...

Question 18

Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl's AGI for the current year after considering the passive investment?

Accepted Answer

The answer of Carl, a physician, earns $200,000 from his...

Question 19

Anita owns Activity A which produces active income and Activity B which produces losses. From a tax planning perspective, Anita will be better off if Activity B is a passive activity.

Accepted Answer

The answer of Anita owns Activity A which produces active...

Question 20

In 2018, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2018 and $100,000 in 2019, Kipp's share being $60,000 in 2018 and $30,000 in 2019. How much of the losses from the partnership can Kipp deduct assuming he owns no other investments and does not participate in the partnership's operations?

Accepted Answer

The answer of In 2018, Kipp invested $65,000 for a...

Quiz 11: Investor Losses