Question 1

Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss.Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie.During this year,activity B produces a $9,000 loss.In addition,Charlie acquires an investment in activity X,a passive activity,this year.Charlie's share of activity X's income is $13,000.Charlie's salary this year is $70,000.As a result,this year Charlie must

Accepted Answer

D) Charlie may deduct Activity B's current $9,000 loss since it is not a passive activity. He may also offset passive activity X's income of $13,000 with the $17,000 carryover from Activity B resulting in a $4,000 carryover.

Question 2

Jana reports the following income and loss:

Activities A,B,and C are all passive activities.
Based on this information,Jana will recognize

Accepted Answer

D) The losses from passive activities B and C may offset and eliminate the income from passive activity A resulting in a net passive loss of $40,000 ($60,000 income less $100,000 loss). The passive loss of $40,000 may not offset the salary and must be carried over to the next tax year.

Question 3

Which of the following is not generally classified as a passive activity?

Accepted Answer

D) An individual participating in a business for more than 500 hours per year is generally classified as a material participant.

Question 4

Tom and Shawn own all of the outstanding stock of Brady Corporation (a retail store operated as a C corporation).This year,Brady generates taxable income of $20,000 from active business operations,and also reports investment interest of $22,000 and losses of $28,000 from a passive activity.As a result,Brady Corporation reports

Accepted Answer

B) Because Brady is a closely held C corporation, the $20,000 of active business income may be offset by $20,000 of the passive loss. The remaining $8,000 loss may be carried over. The investment interest of $22,000 is currently taxable.

Question 5

Nancy reports the following income and loss in the current year.

All three activities are passive activities with respect to Nancy.Nancy also has $21,000 of suspended losses attributable to activity C carried over from prior years.During the year,Nancy sells activity C and realizes a $15,000 taxable gain.What is Nancy's AGI as a result of these transactions?

Accepted Answer

A)
 11ea7e84_1f02_03d5_9a0a_755aec7887c0_TB1260_00 Salary of $60,000 less $10,000 passive loss recognized = $50,000 AGI.

Question 6

Jeff owned one passive activity.Jeff sold the activity and realized a $2,000 gain on the sale.Prior to the sale,he realized a current year loss from the activity of $6,000.In addition,he has suspended losses from prior years of $7,000.What is the net impact on Jeff's AGI this year due to the passive activity?

Accepted Answer

D) Due to the sale, the current year loss and the suspended loss will be recognized. $2,000 gain - $6,000 current loss - $7,000 suspended loss = $11,000 loss.

Question 7

Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

Accepted Answer

The $25,000 loss allowance ceiling only applies to rental real properties in which the taxpayer is an "active" participant. The $25,000 ceiling applies to the total of qualifying losses.

Question 8

Jana reports the following income and loss:

Activities A,B,and C are all passive activities.
Based on this information,Jana has the following suspended losses

Accepted Answer

D) Suspended losses total $40,000 ($60,000 - [$30,000 + $70,000]) and are allocated pro rata to the two loss activities. Activity B: $40,000 × ($30,000/$100,000) = $12,000; Activity C: $40,000 × ($70,000/$100,000) = $28,000.

Question 9

Jorge owns activity X which produced a $20,000 passive loss last year.Jorge's only income last year was wages of $30,000.Jorge is a material participant in activity X this year when it produces a $14,000 loss.This year,Jorge's wages are $40,000.This year,Jorge also has passive activity income from activity Y of $16,000.What is the total passive activity loss carryover to next year?

Accepted Answer

C) $20,000 carryover from prior year - $16,000 current passive income offset = $4,000 carryover to next year. This year's $14,000 active business loss from Activity X may offset Jorge's wages.

Question 10

Jen and Saachi are the owners of J&S Legal Services,P.C.,an incorporated law firm treated as a C corporation for tax purposes.Jen and Saachi work full-time in the firm,performing all of the legal services.This year,J&S generates taxable income of $100,000 from the active business operations,and also reports investment interest income of $22,000 and losses of $28,000 from a passive activity.As a result,J&S Legal Services,P.C.reports taxable income of

Accepted Answer

A) The legal services corporation is both a personal service corporation and a closely held corporation. A PSC cannot offset its active business income or portfolio income with losses from its passive activities.

Question 11

Justin has AGI of $110,000 before considering his $30,000 loss from rental property,which he actively manages.How much of the rental loss can Justin deduct this year?

Accepted Answer

B) Justin must reduce the $25,000 rental loss allowance by 50% of his AGI over $100,000, resulting in a deductible loss of $20,000 [$25,000 - .5($110,000 - $100,000)].

Question 12

Joy reports the following income and loss:

Activities A,B,and C are all passive activities.
Based on this information,Joy has

Accepted Answer

C) The losses from passive activities B and C may offset and eliminate the income from passive activity A resulting in a net passive loss of $30,000 ($60,000 income less $90,000 loss). The passive loss of $30,000 may not offset the salary and must be carried over to the next tax year.

Question 13

Mara owns an activity with suspended passive losses from prior years of $13,000.In the current year,Mara becomes a material participant in the activity.This year the activity generates $6,000 of income.The net effect of this activity on Mara's current year AGI is

Accepted Answer

C) The suspended passive loss will be allowed to offset this year's non-passive income from the activity, but the excess suspended passive loss of $7,000 will carry forward.

Question 14

A taxpayer's rental activities will be considered a trade or business,rather than a passive activity,if

Accepted Answer

D) Rental activities are deemed to be passive unless both the "more than 750 hours" test and more than half of the work hours test are met.

Question 15

During the year,Mark reports $90,000 of active business income from his law practice.He also owns two passive activities.From Activity A,he earns $20,000 of income,and from Activity B,he incurs a $30,000 loss.As a result,Mark

Accepted Answer

B) Mark offsets $20,000 of B's loss against A's income and carries forward the $10,000 loss. His AGI is $90,000 from the active business income.

Question 16

Lewis died during the current year.Lewis owned passive activity property with a FMV of $61,000 and a basis of $48,000.Suspended losses of $15,000 were attributable to the property.How much of the suspended loss is deductible on Lewis's final income tax return?

Accepted Answer

B) Suspended losses are deductible to the extent they exceed the increase in basis. ($61,000 - $48,000) is increase in basis; $13,000 of suspended losses is lost. $15,000 - $13,000 = $2,000.

Question 17

Joseph has AGI of $170,000 before considering the $20,000 rental loss for property which he actively manages.How much of the rental loss can he deduct?

Accepted Answer

A) His AGI exceeds $150,000, so no portion of the rental loss is deductible.

Question 18

Myriah earns salary of $80,000 and $20,000 of dividend income from her stock portfolio this year.Myriah owns a passive activity from which she incurs a $10,000 loss.In addition,the passive activity has generated tax credits this year,and Myriah's share is $5,000.What portion of the $5,000 of tax credits can Myriah apply against her tax liability this year?

Accepted Answer

A) A taxpayer may only use tax credits generated in a passive activity against the portion of the taxpayer's tax liability attributable to passive income. Because of the passive loss, none of the taxpayer's tax liability is attributable to passive income, and the credit must be carried over.

Question 19

Joy reports the following income and loss:

Activities A,B,and C are all passive activities.
Based on this information,Joy has the following suspended losses:

Accepted Answer

A) Suspended losses total $30,000 ($60,000 - [$35,000 + $55,000]) and are allocated pro rata to the two loss activities. Activity B: $30,000 × ($35,000/$90,000) = $11,667; Activity C: $30,000 × ($55,000/$90,000) = $18,333.

Question 20

An individual is considered to materially participate in an activity if any of the following tests are met with the exception of

Accepted Answer

B) The individual participates in the activity for more than 100 hours (not 75) during the year, and that participation is more than any other individual's participation for the year.

Quiz 8: Losses and Bad Debts

Jana reports the following income and loss: Activities A,B,and C are all passive activities. Based on this information,Jana will recognize