Question 1

Alma is in the business of dairy farming.During the year, one of her barns was completely destroyed by fire.The adjusted basis of the barn was $90,000.The fair market value of the barn before the fire was $75,000.The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy.Alma has adjusted gross income for the year of $40,000 before considering the casualty).Determine the amount of loss she can deduct on her tax return for the current year.

Accepted Answer

The answer of Alma is in the business of dairy...

Question 2

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...

Question 3

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 4

In the current year, Juan's home was burglarized.Juan had the following items stolen: ∙ Securities worth $25,000.Juan purchased the securities four years ago for $20,000.
∙ New tools which Juan had purchased two weeks earlier for $8,000.Juan uses the tools in making repairs at an apartment house that he owns and manages.
∙ An antique worth $15,000.Juan inherited the antique a family keepsake) when the property was worth $11,000.
Juan's homeowner's policy had a $50,000 deductible clause for thefts.If Juan's salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft.

Accepted Answer

The answer of In the current year, Juan's home was...

Question 5

Rick, a computer consultant, owns a separate business not real estate) in which he participates.He has one employee who works part-time in the business.

Accepted Answer

The answer of Rick, a computer consultant, owns a separate...

Question 6

In 2017, Sarah who files as single) had silverware worth $10,000 basis $6,000) stolen from her home.Sarah's insurance company told her that her policy did not cover the theft.Sarah's other itemized deductions last year were $2,000.She had AGI of $30,000 last year.In August of 2018, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000.Determine the tax treatment of the $5,000 received by Sarah during 2018.

Accepted Answer

The answer of In 2017, Sarah who files as single)...

Question 7

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 8

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 9

Paula owns four separate activities.She elects not to group them together as a single activity under the "appropriate economic unit" standard.Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D.She has one employee, who works 125 hours in Activity D.Which of the following statements is correct?

Accepted Answer

The answer of Paula owns four separate activities.She elects not...

Question 10

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, he can offset the $60,000 loss against the $100,000 income. This is because the IRS allows a taxpayer to offset income from one source against losses from another source if they are considered part of the same activity. In this case, both departments are part of the same business, so they can be treated as a single activity. With this treatment, Charles can take the $60,000 loss and offset it against the $100,000 income, resulting in a net income of $40,000 for the business.

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

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

The answer of White Corporation, a closely held personal service...

Question 13

Ahmad owns four activities.He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D.Which of the following statements is correct?

Accepted Answer

The answer of Ahmad owns four activities.He participated for 120...

Question 14

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 $60,000 ($105,000 selling price - $45,000 adjusted basis). However, only $15,000 of this gain will be taxable because the $45,000 suspended losses will offset $45,000 of the gain, leaving only $15,000 of taxable gain.

Question 15

In 2018, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:  The personal casualties occurred in a Federally-declared disaster area.Determine the amount of Morley's itemized deduction from the losses.

Accepted Answer

The answer of In 2018, Morley, a single taxpayer, had...

Question 16

Ned, a college professor, owns a separate business not real estate) in which he participates in the current year.He has one employee who works part-time in the business.

Accepted Answer

A person qualifies as a material participant in a business if they participate for at least 500 hours during the year. Choice A is incorrect because Ned does not qualify as a material participant even if he has an employee working for him. Choice B is incorrect because although it is possible for Ned to qualify as a material participant with only 95 hours of participation, the 5 hours of participation from the employee are not enough to change the result. Choice C is incorrect because even though Ned participates for 500 hours, the employee's participation is not enough to make up for the rest of the required participation hours. Choice D is correct because Ned participates for more than 500 hours and the employee's participation is significant enough to allow Ned to qualify as a material participant.

Question 17

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 18

In 2018, Cindy is married and files a joint return.She operates a sole proprietorship in which she materially participates.Her proprietorship generates gross income of $225,000 and deductions of $525,000, resulting in a loss of $300,000.What is Cindy's excess business loss for the year?

Accepted Answer

The answer of In 2018, Cindy is married and files...

Question 19

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

Wang's investment in the partnership is considered a passive activity and subject to the passive activity loss provisions. As a material participant, he can deduct up to $80,000 of losses in the year incurred, but any excess loss cannot be deducted in the current year and must be carried forward. Therefore, Wang cannot deduct the $20,000 loss in 2018 and 2019.

Question 20

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

The loss from Activity B can offset the income from Activity A, leaving a remaining suspended loss of $20,000 ($50,000 - $30,000). Therefore, the answer is (C) $20,000.

Quiz 6: Losses and Loss Limitations