Question 1

Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk.If the business incurs a loss of $80,000 from operations, Stuart can deduct the full amount.

Accepted Answer

Stuart can only deduct losses up to the amount he has at risk, which is $50,000. The remaining $30,000 loss cannot be deducted until he has additional amounts at risk in the future.

Question 2

Coyote Corporation has active income of $45,000 and a passive loss of $23,000 in the current year.Coyote cannot deduct the $23,000 loss if it is a personal service corporation.

Accepted Answer

If Coyote Corporation is classified as a personal service corporation, it will not be able to deduct passive losses against its active income, regardless of whether it is currently at a gain or a loss position.

Question 3

From January through November, Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest.The partnership has four full-time employees.During December, Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards.Vern qualifies as a material participant.

Accepted Answer

False

Question 4

In the current year, Rich has a $40,000 loss from a business he owns.His at-risk amount at the end of the year, prior to considering the current year loss, is $24,000.He will be allowed to deduct the $40,000 loss this year if he is a material participant in the business.

Accepted Answer

A taxpayer can only deduct losses up to the amount they have at risk in the business. Since Rich's at-risk amount is $24,000, he can only deduct up to that amount, not the full $40,000 loss.

Question 5

A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.

Accepted Answer

A taxpayer is considered a material participant in a significant participation activity if they participate for more than 100 hours during the tax year, and the total participation in all significant participation activities exceeds 500 hours.

Question 6

Wolf Corporation has active income of $55,000 and a passive loss of $33,000 in the current year.Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

Accepted Answer

The answer of Wolf Corporation has active income of $55,000...

Question 7

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing.Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Accepted Answer

According to the tax code (section 465), if debt on an activity is converted from recourse to nonrecourse financing, it can result in a reduction of the taxpayer's at-risk amount. If this reduction causes the at-risk amount to fall below zero, then the taxpayer may have to recapture previously allowed losses. This is because the taxpayer is no longer at risk for the amount of debt that has been converted to nonrecourse financing.

Question 8

In the current year, Louise invests $50,000 for a 10% 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

Passive activity losses can only be deducted against passive income. If Louise has no other passive income, the $10,000 loss is suspended and carried forward to offset future passive income.

Question 9

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 10

Mary Jane participates for 100 hours during the year in an activity she owns. She has no employees and is the only participant in the activity. The activity is a significant participation activity.

Accepted Answer

For an activity to be considered a significant participation activity, the taxpayer must participate for more than 100 hours during the tax year. Since Mary Jane participates for exactly 100 hours, it does not meet the threshold for significant participation.

Question 11

Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Gray is not a personal service corporation, it may deduct $34,000 of the passive loss.

Accepted Answer

This is because the deduction for passive losses is limited to the lesser of active income or $25,000 for non-personal service corporations. Since Gray Company has active income of $34,000, it may deduct the entire $34,000 of the passive loss.

Question 12

Rachel participates 150 hours in Activity A and 400 hours in Activity B, both of which are nonrental businesses.Both activities are passive.

Accepted Answer

The fact that the activities are passive indicates that Rachel is not materially participating in them. Therefore, the income generated from these activities would be considered passive income for tax purposes.

Question 13

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

Accepted Answer

Tax credits related to a passive activity are generally limited to the tax liability arising from that activity. When the activity is sold at a loss, unused credits may not be fully utilized unless specific conditions are met, such as the ability to offset the loss against other passive income or the credits being of a type that can be carried over to other tax years.

Question 14

David participates 580 hours in an activity during the year; others participate for 1,400 hours.David is a material participant in the activity.

Accepted Answer

David's participation of 580 hours exceeds the 500 hours minimum threshold for being considered a material participant in the activity.

Question 15

Jackson Company incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Jackson is a personal service corporation, it may deduct $34,000 of the passive loss.

Accepted Answer

Personal service corporations are not eligible for the passive activity loss deduction.

Question 16

Tom participates for 300 hours in Activity A and 250 hours in Activity B, both of which are nonrental businesses.Both activities are active.

Accepted Answer

The statement is true as it states that both activities (A and B) are nonrental businesses and are active, and Tom has participated in both of them for a total of 550 hours.

Question 17

Joe participates 95 hours in an activity, while an employee participates 5 hours.Joe has materially participated in the activity.

Accepted Answer

Joe has participated for 95 hours which exceeds the minimum requirement of 100 hours for material participation according to IRS guidelines. Therefore, Joe has materially participated in the activity.

Question 18

Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year.During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations.Jack's at-risk amount at the end of the year is $44,000.

Accepted Answer

Jack's at-risk amount at the end of the year would be $22,000. Initially, it's $42,000. His share of the loss ($60,000 * 10% = $6,000) reduces it to $36,000. Nonrecourse debt does not increase his at-risk amount, so it remains unchanged by the borrowing.

Question 19

Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective, Linda will be better off if Activity A is not passive.

Accepted Answer

If Activity A is not passive, Linda may be able to deduct the losses against her portfolio income. If Activity A is passive, the losses may be limited and can only be used to offset passive income.

Question 20

Judy owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year.The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year.Her at-risk amount at the end of the year is $43,000.

Accepted Answer

The partnership borrowed $50,000 on a recourse note, which increases Judy's at-risk amount to $85,000 ($35,000 + $50,000). However, her at-risk amount at the end of the year is only $43,000, indicating that she may have sustained a loss or reduction in her at-risk amount during the year. Without additional information, it is not possible to determine the cause of this reduction.

Quiz 11: Investor Losses