Question 1

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. The IRS allows business owners to offset income and losses from different departments within the same business if they are treated as a single activity. So, Charles can use the loss from Department B to offset the income from Department A and reduce his overall taxable income.

Question 2

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 20%...

Question 3

Dena owns interests in five businesses and has full-time employees in each business.She participates for 100 hours in Activity A,120 hours in Activity B,130 hours in Activity C,140 hours in Activity D,and 125 hours in Activity E.

Accepted Answer

In order to determine whether Dena is a material participant, we need to use the IRS’s material participation tests. The test for significant participation activities (SPA) requires participation of more than 100 hours per year and more participation than anyone else. Since all five activities meet the 100-hour test, all five are SPAs. To determine if Dena materially participates, we must first determine if she satisfies any of the seven tests. Dena satisfies Test 2, which requires that the individual participate in the activity for more than 100 hours and also more than anyone else. Therefore, Dena is a material participant in any activity where she participates for more than 100 hours and more than anyone else. According to the information in the problem, that includes Activities B, C, D, and E. Therefore, the best choice is D.

Question 4

Maria,who owns a 50% interest in a restaurant,has been a material participant in the restaurant activity for the last 20 years.She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future.However,she continues to be a material participant in a retail store in which she is a 50% partner.The restaurant operations produce a loss for the current year,and Maria's share of the loss is $80,000.Her share of the income from the retail store is $150,000.She does not own interests in any other activities.

Accepted Answer

Since Maria has been a material participant in the restaurant activity for the past 20 years, she can use the passive activity loss rules to offset the $80,000 loss from the restaurant against the $150,000 income from the retail store, as long as she continues to be a material participant in the retail store activity. Option A is incorrect as Maria has been a material participant in the restaurant activity for the past 20 years. Option C is incorrect as there is no three-year waiting period for retired material participants. Option D is incorrect as Maria may eventually become a limited participant in the restaurant activity, in which case the losses would be treated as passive.

Question 5

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

As a material participant in the LLC, Joanne can deduct her share of losses on her individual tax return. However, there are limitations on the amount of losses that can be deducted.

In 2015, Joanne's share of the LLC's losses was $68,000 but her investment was only $90,000. This means that her losses exceed her investment, which is known as being "at risk." Therefore, she can only deduct up to the amount she has at risk, which in this case is $68,000.

In 2016, the LLC's losses were $180,000 but Joanne's share was only $36,000. This means that her losses do not exceed her at-risk amount, so she can deduct the full $36,000.

Therefore, Joanne can deduct a total of $68,000 in 2015 and $22,000 ($36,000 - $14,000) in 2016 for a total deduction of $90,000. The best choice is B.

Question 6

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 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 losses is $0 if it is a personal service corporation.
Which of the following answers is correct?

Accepted Answer

Statement 1 is correct because if Green Corporation is a closely held C corporation and not a personal service corporation, it can deduct up to $50,000 of passive losses against active income. 
Statement 2 is also correct because a personal service corporation cannot deduct any passive losses against active income. Therefore, the correct answer is C, "Both statements 1 and 2."

Question 7

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 8

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 corporation,has...

Question 9

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 business (not...

Question 10

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 answer of Carl,a physician,earns $200,000 from his medical practice...

Question 11

Jed spends 32 hours a week,50 weeks a year,operating a bicycle rental store that he owns at a resort community.He also owns a music store in another city that is operated by a full-time employee.He elects not to group them together as a single activity under the "appropriate economic unit" standard.Jed spends 40 hours per year working at the music store.

Accepted Answer

The answer of Jed spends 32 hours a week,50 weeks...

Question 12

Leigh,who owns a 50% interest in a sporting goods store,was a material participant in the activity for the last fifteen years.She retired from the sporting goods store at the end of last year and will not participate in the activity in the future.However,she continues to be a material participant in an office supply store in which she is a 50% partner.The operations of the sporting goods store resulted in a loss for the current year and Leigh's share of the loss is $40,000.Leigh's share of the income from the office supply store is $75,000.She does not own interests in any other activities.

Accepted Answer

Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store because she is still a material participant in the office supply store. The fact that she retired from the sporting goods store does not impact her ability to use the loss to offset her income from another business in which she is still an active participant.

Question 13

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 on the sale is $60,000 ($105,000 selling price - $45,000 adjusted basis). However, only the portion of the gain that exceeds the suspended losses is taxable. Since the suspended losses are $45,000 and the total gain is $60,000, the taxable gain is $15,000.

Question 14

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 50%...

Question 15

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 not...

Question 16

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 17

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 business (not...

Question 18

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 30%...

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

To calculate Josh's suspended loss for the year, we need to first determine his passive activity income (PAI):

PAI = Income from Activity A - Loss from Activity B
PAI = $30,000 - (-$50,000)
PAI = $80,000

Since Josh's PAI is positive, he is not required to suspend any losses this year. So the amount of Josh's suspended loss for the year is $0.

Therefore, the correct answer is choice letter A.

Question 20

Jenny spends 32 hours a week,50 weeks a year,operating a bicycle rental store that she owns at a resort community.She also owns a music store in another city that is operated by a full-time employee.Jenny spends 140 hours per year working at the music store.She elects not to group them together as a single activity under the "appropriate economic unit" standard.

Accepted Answer

The answer of Jenny spends 32 hours a week,50 weeks...

Quiz 6: Losses and Loss Limitations