Question 1

Oriole Corporation has active income of $45,000 and a passive loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.

Accepted Answer

False

Question 2

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 at­risk 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 3

Dick participates in an activity for 90 hours during the year. He has no employees and there are no other participants. Dick is a material participant.

Accepted Answer

According to the IRS, in order to be considered a material participant in an activity, the individual must have participated in the activity for more than 500 hours during the year. Since Dick only participated for 90 hours, he does not meet this threshold and therefore is not a material participant.

Question 4

Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active.

Accepted Answer

The answer of Tom participates for 100 hours in Activity...

Question 5

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

Both activities are nonrental businesses and Tom has participated in each for more than 500 hours, which qualifies him for material participation status under the IRS rules for determining passive activity. Therefore, both activities are considered active.

Question 6

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

Accepted Answer

According to the IRS guidelines, a taxpayer is considered a material participant in an activity if they spent more than 500 hours per year on the activity.

Question 7

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 8

Nathan owns Activity A, which produces income, and Activity B, which produces passive losses. From a tax planning perspective, Nathan will be better off if Activity A is passive.

Accepted Answer

If Activity A produces passive income, it can be offset by the passive losses from Activity B, potentially reducing Nathan's overall taxable income. However, if Activity A produces active income, it cannot be used to offset passive losses and Nathan may end up owing more in taxes.

Question 9

In the current year, Don has a $55,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current year loss, is $36,000. He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business.

Accepted Answer

Don can only deduct losses up to the amount he is at risk for in the business, which is $36,000, regardless of his participation level.

Question 10

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

Accepted Answer

The deductible loss for a non-passive activity is limited to the amount of the taxpayer's at-risk basis. In this case, Sherri's at-risk basis is $20,000, so she would only be able to deduct up to $20,000 of the $32,000 loss. The remaining $12,000 loss can be carried forward to future tax years.

Question 11

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 12

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 13

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

As a closely held C corporation, Gray Company is not subject to the passive activity loss limitations that apply to individuals, estates, and trusts. Therefore, it may deduct the full $34,000 of the passive loss against its active income. The remaining $16,000 of the passive loss may be carried forward to future years or offset against other passive income.

Question 14

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 15

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.

Accepted Answer

If Kelly sold the activity at a loss, then the suspended passive loss of $44,000 can be deducted to the extent of the loss on the sale. Therefore, the statement "the suspended loss is not deductible" is false.

Question 16

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

The answer of From January through November, Vern participated for...

Question 17

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 allowed to deduct passive losses against active or portfolio income. They can only carry forward the passive losses to future years.

Question 18

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 at­risk amount is reduced below zero as a result of the debt restructuring.

Accepted Answer

When an activity undergoes a debt restructuring that results in a conversion from recourse to nonrecourse financing, any previously allowed losses that were based on the recourse financing can be subject to recapture if the taxpayer's at-risk amount is reduced below zero as a result of the conversion. This is because nonrecourse financing can provide more protection for the taxpayer's investment than recourse financing, and the tax law seeks to prevent a double benefit (i.e. deductions for losses that were based on the taxpayer's personal liability for the debt, followed by a reduction in that liability without a corresponding increase in the taxpayer's at-risk amount). Therefore, the recapture rule helps to maintain the connection between the taxpayer's investment and the allowed losses.

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, reducing her taxable income overall. However, if Activity A is passive, she may only be able to carry forward the losses to offset future passive income, which may not be as beneficial.

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 answer of Judy owns a 20% interest in a...

Quiz 11: Investor Losses

Oriole Corporation has active income of $45,000 and a passive loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.

Dick participates in an activity for 90 hours during the year. He has no employees and there are no other participants. Dick is a material participant.

Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active.

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

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

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.

Nathan owns Activity A, which produces income, and Activity B, which produces passive losses. From a tax planning perspective, Nathan will be better off if Activity A is passive.

In the current year, Don has a $55,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current year loss, is $36,000. He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business.

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

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

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.

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.

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.

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.

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.

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 atrisk amount is reduced below zero as a result of the debt restructuring.

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.

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.

Quiz 11: Investor Losses

Oriole Corporation has active income of $45,000 and a passive loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.

Dick participates in an activity for 90 hours during the year. He has no employees and there are no other participants. Dick is a material participant.

Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active.

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

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

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.

Nathan owns Activity A, which produces income, and Activity B, which produces passive losses. From a tax planning perspective, Nathan will be better off if Activity A is passive.

In the current year, Don has a $55,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current year loss, is $36,000. He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business.

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

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

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.

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.

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.

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.

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.

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 at­risk amount is reduced below zero as a result of the debt restructuring.

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.

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.

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 atrisk amount is reduced below zero as a result of the debt restructuring.