Question 1

In 2019, 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 2019 and $180,000 in 2020.Joanne's share of the LLC's losses was $68,000 in 2019 and $36,000 in 2020.How much of these losses can Joanne deduct?

Accepted Answer

The answer of In 2019, Joanne invested $90,000 for a...

Question 2

In 2019, 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 2019, Morley, a single taxpayer, had...

Question 3

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 4

In the current year, Juan's home was burglarized.He had the following items stolen: ∙ Securities worth $25,000.Juan purchased the securities four years ago for $20,000. ∙ New tools that Juan had purchased two weeks earlier for $8,000.He 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 his salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft.

Accepted Answer

The theft loss deduction for personal use property is limited to the amount that exceeds $100 per event and 10% of the taxpayer's adjusted gross income (AGI). Since Juan's AGI (assuming it's similar to his salary) is $50,000, and his homeowner's policy has a $50,000 deductible (which exceeds the total value of stolen items), he would not be able to claim any theft loss deduction. Additionally, theft losses of personal property are only deductible to the extent they exceed 10% of AGI and are subject to the $100 floor, which in this scenario, due to the high deductible, results in no deductible loss. The specific rules for deducting losses on securities, tools used for business, and inherited antiques would not apply here because the insurance deductible is not met.

Question 5

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 attributable to this property of $45,000, the taxable gain is only $60,000 - $45,000 = $15,000. Therefore, the answer is choice (D).

Question 6

In 2019, 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 is a material participant in the partnership, meaning he meets one of the following criteria: (1) he participates in the partnership for more than 500 hours during the tax year, (2) his participation in the partnership constitutes substantially all of the participation in the activity during the tax year, (3) he participates in the partnership for more than 100 hours during the tax year and no one else participates more than him, or (4) he materially participated in the activity for any 5 out of the prior 10 tax years.

Despite being a material participant, Wang's $100,000 loss is still considered a passive activity loss under the passive activity loss provisions because he only has a 20% interest in the partnership. Passive activity losses cannot be used to offset income from non-passive sources (such as wages, interest, or dividends) and can only be used to offset passive activity income or carried forward to future years when there is passive activity income. Thus, Wang cannot deduct the $100,000 loss in 2019 or 2020.

Question 7

In 2019, Mary had the following items:  Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2019.

Accepted Answer

The answer of In 2019, Mary had the following items:...

Question 8

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 would be $245,000. This is calculated by adding his earnings from his medical practice ($200,000), dividends and interest ($45,000), and passive income ($5,000). The loss from a passive activity ($50,000) cannot be deducted from his AGI because losses from passive activities are generally only deductible against passive income, not other types of income. Therefore, his total AGI is $200,000 + $45,000 + $5,000 = $250,000. However, given the options provided, the closest correct answer reflecting the calculation described would be $245,000, indicating a possible mistake in the explanation process. The correct approach to calculating AGI with the given options should not include the passive income loss directly against other types of income, but the final answer should reflect the total income without the passive loss deduction, which is indeed $245,000, acknowledging an error in the explanation process.

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

Josh's suspended loss for the year is the excess of the loss from Activity B over the income from Activity A, which is $50,000 - $30,000 = $20,000. Therefore, the answer is (C) $20,000.

Question 10

Alicia was involved in an automobile accident in 2019.Her car was used 60% for business and 40% for personal use.The car had originally cost $40,000.At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation.The car was totally destroyed and Alicia had let her car insurance expire.If her AGI is $50,000 (before considering the loss), determine her AGI and itemized deduction for the casualty loss.

Accepted Answer

The answer of Alicia was involved in an automobile accident...

Question 11

In 2019, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity.The partnership reported losses of $200,000 in 2019 and $100,000 in 2020, Kipp's share being $60,000 in 2019 and $30,000 in 2020.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 2019, Kipp invested $65,000 for 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

Under tax regulations, passive activity losses can only be deducted against passive income. Since White Corporation has no passive income (only active business income and portfolio income), it cannot deduct any of its passive activity losses.

Question 13

John had adjusted gross income of $60,000 in 2019.During the year, his personal use summer home was damaged by a fire.Pertinent data with respect to the home follows:  John had an accident with his personal use car.As a result of the accident, He was cited with reckless driving and willful negligence.Pertinent data with respect to the car follows:  What is John's itemized casualty loss deduction?

Accepted Answer

The answer of John had adjusted gross income of $60,000...

Question 14

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

According to the IRS rules, if the taxpayer actively participates in each of the two departments and treats them as a single activity, he can offset the $60,000 loss against the $100,000 income to arrive at a net profit of $40,000. Therefore, option D is correct.

Question 15

In 2019, Grant's personal residence was completely destroyed by fire.He 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:  What is Grant's allowable casualty loss deduction?

Accepted Answer

The answer of In 2019, Grant's personal residence was completely...

Question 16

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

Closely held C corporations that are not personal service corporations can deduct passive activity losses against active income, up to the amount of their active income ($50,000 in this case). Personal service corporations, however, cannot deduct passive activity losses against active income, so their current deduction for passive activity losses would be $0.

Question 17

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).  Matt's suspended losses are as follows:

Accepted Answer

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

Question 18

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 regulations concerning partnerships and at-risk provisions. Ted's nondeductible loss exceeding his initial investment can be carried over for future use, his ability to deduct carried over losses is contingent on his at-risk amount, and he cannot deduct more than his at-risk amount against other income.

Question 19

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2019.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 he feared 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 $0 because personal casualty losses are only deductible to the extent they exceed 10% of the taxpayer's adjusted gross income (AGI) and are subject to a $100 floor per casualty event. Since Norm did not file an insurance claim, his potential deductible loss is reduced by the amount of the insurance he could have claimed ($2,000). The loss would be calculated as the lesser of the adjusted basis ($13,000) or the fair market value ($10,000), minus any insurance reimbursement. However, because he chose not to file a claim, his deductible loss is further reduced by the insurance amount he could have received. Given these rules and the specifics of Norm's situation, his deductible loss is effectively $0.

Question 20

In 2017, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home.Her insurance company told her that her policy did not cover the theft.In 2017, Sarah's other itemized deductions were $2,000, and she had AGI of $30,000.In February 2019, 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 2019.

Accepted Answer

The $5,000 received from the insurance company in 2019 is a reimbursement for a loss Sarah took a deduction for in a previous year. Since the reimbursement does not exceed the amount of the loss ($10,000 value - $6,000 basis = $4,000 loss), and assuming she deducted this loss on her tax return, none of the reimbursement needs to be included in her gross income for 2019. This is because the reimbursement effectively reduces the amount of the loss she claimed, but does not create taxable income since it does not exceed the loss amount.

Quiz 6: Losses and Loss Limitations

In 2019, 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.