Question 1

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 2

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

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Question 3

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

All the statements provided are correct within the context of tax laws regarding partnership losses and at-risk provisions. Ted's nondeductible loss due to the at-risk limitation can indeed be carried over for future use, and if he has income from the partnership, it can offset the carried-over loss up to the amount of his at-risk investment.

Question 4

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.

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Question 5

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. According to the IRS, to treat multiple activities as a single activity, the taxpayer must establish that the activities constitute an appropriate economic unit for measuring gain or loss under the passive activity rules. Since Department A and Department B are part of the same business and are interdependent on each other, it is reasonable to consider them as a single activity. Therefore, Charles can offset the loss from Department B against the income from Department A if he chooses to treat them as a single activity.

Question 6

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2017.The car's adjusted basis at the time of the accident was $13,000.Its fair market value was $10,000.The car was covered by a $2,000 deductible insurance policy.Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates.His adjusted gross income was $14,000 (before considering the loss).What is Norm's deductible loss?

Accepted Answer

Norm's deductible loss is calculated by subtracting the fair market value of the car ($10,000) from its adjusted basis ($13,000), which is $3,000. Since he did not file a claim against the insurance policy, he cannot deduct the $2,000 deductible from this loss. However, his deductible loss is limited to the amount of his adjusted gross income (AGI), which is $14,000. Therefore, his deductible loss is $500 ($3,000 - $2,500).

Question 7

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

According to the IRS, a material participant is someone who participates in an activity for more than 500 hours during the year. Additionally, if no one participant spends more time working in the business and more than 100 hours than any other participant, they are also considered to be a material participant. In this case, Ned participates for 600 hours while his employee only works for 2,000, which meets the criteria for being a material participant.

Question 8

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

None of the activities individually meet the 500-hour material participation test, and since Paula elected not to group them, she cannot combine the hours to meet the test. Therefore, none of the other statements are correct.

Question 9

If a taxpayer has a net operating loss (NOL) in 2017 of $20,000, of which $8,000 is attributable to a theft of rental use property, the taxpayer may:

Accepted Answer

According to IRS rules, a taxpayer can carry back an NOL for either 2 years or 3 years, depending on the circumstances. However, if the NOL is partially attributable to a theft, the taxpayer may carry that portion back up to 5 years. In this scenario, $8,000 of the NOL is attributable to a theft, so the taxpayer can carry that portion back 5 years, while the remaining $12,000 can be carried back 2 years. Therefore, the best choice is option C.

Question 10

In 2017, Arnold 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 Arnold's share.Which of the following statements is incorrect?

Accepted Answer

Statement D is incorrect because Arnold is a material participant in the partnership, which means the passive activity loss rules do not apply to his $100,000 loss. The loss can be deductible up to the amount he is at risk ($80,000 in this case), and the rest can be carried over, subject to the at-risk provisions, not the passive activity loss provisions.

Question 11

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 $105,000 - $45,000 = $60,000. However, since there are suspended losses of $45,000, only $15,000 of that gain is taxable. Therefore, the taxable gain is $15,000 and the total gain is $60,000. Choice (D) is the correct answer.

Question 12

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 13

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

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Question 14

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

Carl's AGI is calculated by adding his earnings from his medical practice ($200,000), dividends and interest ($45,000), and passive income ($5,000), then subtracting the loss from the passive activity ($50,000). This results in an AGI of $200,000 + $45,000 + $5,000 - $50,000 = $200,000. However, since passive losses can only be deducted against passive income, the $50,000 loss is not fully deductible because he only has $5,000 of passive income. Therefore, his AGI is $200,000 (from his practice) + $45,000 (dividends and interest) = $245,000.

Question 15

Matt has three passive activities and has at-risk amounts in excess of $100,000 for each.During the year, the activities produced the following income (losses). $$\begin{array} { l r } 
\text { Activity A } & ( \$ 60,000 ) \
\text { Activity B } & ( 40,000 ) \
\text { Activity C } & 75,000 \
\text { Net passive activity loss } & ( \$ 25,000 ) \
\hline
\end{array}$$ ? Matt's suspended losses are as follows:

Accepted Answer

The answer of Matt has three passive activities and has...

Question 16

In 2017, Grant's personal residence was completely destroyed by fire.Grant was insured for 100% of his actual loss, and he received the insurance settlement.Grant had adjusted gross income, before considering the casualty item, of $30,000.Pertinent data with respect to the residence follows: $$\begin{array} { l r } 
\text { Cost basis } & \$ 280,000 \
\text { Value before casualty } & 250,000 \
\text { Value after casualty } & - 0 -
\end{array}$$ What is Grant's allowable casualty loss deduction?

Accepted Answer

Since Grant was insured for 100% of his actual loss and received the insurance settlement, he does not have an allowable casualty loss deduction. The insurance compensation covers his entire loss.

Question 17

In 2017, 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 2017 and $180,000 in 2018.Joanne's share of the LLC's losses was $68,000 in 2017 and $36,000 in 2018.How much of these losses can Joanne deduct?

Accepted Answer

The answer of In 2017, Joanne invested $90,000 for a...

Question 18

In 2017, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity.The partnership reported losses of $200,000 in 2017 and $100,000 in 2018, Kipp's share being $60,000 in 2017 and $30,000 in 2018.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 2017, Kipp invested $65,000 for a...

Question 19

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 suspended losses for each activity are calculated as follows:
-Activity A: $0 (since it produced income)
-Activity B: $50,000
Therefore, the total suspended loss for the year is $50,000. However, only the losses from Activity B are suspended, since Activity A produced income.

Question 20

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

(1) is true because a closely held C corporation that is not a personal service corporation can deduct up to $50,000 of passive activity losses against active income. 
(2) is also true because a personal service corporation is not allowed to deduct any passive activity losses against active income. Therefore, both statements are correct.

Quiz 6: Losses and Loss Limitations