Question 1

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

The answer of Ned, a college professor, owns a separate...

Question 2

In 2015, 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 2015 and $180,000 in 2016. Joanne's share of the LLC's losses was $68,000 in 2015 and $36,000 in 2016. How much of these losses can Joanne deduct?

Accepted Answer

The answer of In 2015, Joanne invested $90,000 for a...

Question 3

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

According to the passive activity loss rules, losses from a passive activity can only offset income from another passive activity. Since Activity A has income, it can only offset the income from Activity B up to a maximum of $30,000. The remaining $20,000 loss from Activity B is suspended and carried forward to future tax years. Therefore, Josh's suspended loss for the year is $20,000.

Question 4

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. 
The taxable gain is the total gain minus the suspended losses, which is $60,000 - $45,000 = $15,000.

Question 5

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 calculation for Carl's AGI is:

$200,000 (income from medical practice) 
+ $45,000 (dividends and interest) 
+ $5,000 (passive activity income) 
- $50,000 (passive activity loss)

= $200,000 + $45,000 + $5,000 - $50,000 
= $200,000

Therefore, Carl's AGI for the year is $200,000, which is option (D).

Question 6

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, resulting in a net income of $40,000. This is because the IRS allows taxpayers to combine multiple activities into a single activity if they meet certain criteria, such as being part of a larger business undertaking. In this case, since the two departments are part of Charles' business, he can elect to treat them as a single activity and offset the losses against the income.

Question 7

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:
Which of the following answers is correct?

Accepted Answer

The answer of Green Corporation earns active income of $50,000...

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

The answer of Paula owns four separate activities. She elects...

Question 9

In 2015, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2015 and $100,000 in 2016, Kipp's share being $60,000 in 2015 and $30,000 in 2016. 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 2015, Kipp invested $65,000 for a...

Question 10

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 11

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 12

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2016. 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

The answer of Norm's car, which he uses 100% for...

Question 13

White Corporation, a closely held personal service corporation, has $150,000 of passive losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive loss can White Corporation deduct?

Accepted Answer

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

Question 14

In 2016, 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:
What is Grant's allowable casualty loss deduction?

Accepted Answer

The answer of In 2016, Grant's personal residence was completely...

Question 15

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 16

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 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

To determine the allocation of suspended losses, the at-risk amounts for each activity must first be considered. Since each activity has an at-risk amount in excess of $100,000, all of the losses from each activity can potentially be used to offset other income.

From the chart, it is clear that Activity C produced income of $25,000, which is enough to absorb all of the suspended losses from that activity. Therefore, $25,000 is allocated to C and $0 to A and B.

Of the remaining losses, $12,500 must be allocated to either Activity A or B in order to bring their at-risk amounts below $100,000. Since the losses are equally split between the two activities, each is allocated $6,250. However, since Activity A produced a loss of $9,000, $6,250 of this loss can be used to offset other income, leaving a suspended loss of $2,750. Therefore, $15,000 (the remaining suspended loss for A) is allocated to A and $10,000 (the remaining suspended loss for B) is allocated to B.

Therefore, the correct answer is (C) $15,000 is allocated to A; $10,000 to B.

Question 18

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...

Question 19

In 2015, 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

The answer of In 2015, Arnold invests $80,000 for a...

Question 20

If a taxpayer has a net operating loss (NOL) in 2016 of $20,000, of which $8,000 is attributable to a theft of rental use property, the taxpayer may:

Accepted Answer

The $8,000 attributable to theft of rental use property may be carried back 3 years, while the remaining NOL of $12,000 may only be carried back 2 years according to the Tax Cuts and Jobs Act (TCJA). Therefore, option C is the best choice.

Quiz 6: Losses and Loss Limitations