Question 1

Stacy,who is married and sole shareholder of ABC Corporation,sold all of her stock in the corporation for $100,000.Stacy had organized the corporation in 2009 by contributing $225,000 and receiving all of the capital stock of the corporation.ABC Corporation is a domestic corporation engaged in the manufacturing of ski boots.The stock in ABC Corporation qualified as Sec.1244 stock.The sale results in a(n)

Accepted Answer

Since the stock qualifies as Sec.1244 stock and was sold for $100,000, Stacy can claim an ordinary loss of $100,000. However, since she originally contributed $225,000 to the corporation, she also has a long-term capital loss of $125,000 ($225,000 - $100,000). Therefore, the answer is that Stacy has an ordinary loss of $100,000 and a long-term capital loss of $25,000.

Question 2

Erin,a single taxpayer,has 1,000 shares of 1244 stock she purchased directly from AAA Corporation for $120,000 five years ago.The stock has a FMV of $30,000,and Erin is thinking of selling the stock.She has no other capital gains or losses for the year.Discuss the tax consequences and planning opportunities relating to selling the stock.

Accepted Answer

The answer of Erin,a single taxpayer,has 1,000 shares of 1244...

Question 3

Individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses,subject to AGI limitations.

Accepted Answer

This is true according to the IRS guidelines for deducting losses from rental real property. However, the $25,000 limit is subject to certain adjusted gross income (AGI) limitations outlined by the IRS.

Question 4

Losses from passive activities that cannot be deducted currently are carried over for up to 5 subsequent years.

Accepted Answer

The answer of Losses from passive activities that cannot be...

Question 5

For purposes of applying the passive loss limitations for rental real estate,active participation requires a greater time commitment by the taxpayer than does material participation.

Accepted Answer

Active participation requires a lesser time commitment than material participation.

Question 6

Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules.

Accepted Answer

According to the IRS, if two separate businesses are conducted at the same location and one is profitable while the other is not, they may be treated as separate activities under the passive activity rules. This means that losses from one activity may not be used to offset income from the other activity.

Question 7

If a taxpayer disposes of an interest in a passive activity,unused carryover losses are available to the purchaser of the interest.

Accepted Answer

The answer of If a taxpayer disposes of an interest...

Question 8

Individual taxpayers can offset portfolio income with passive losses.

Accepted Answer

The answer of Individual taxpayers can offset portfolio income with...

Question 9

A closely held C Corporation's passive losses may offset its active income.

Accepted Answer

According to IRS rules, a closely held C Corporation's passive losses may offset its active income.

Question 10

For purposes of the application of the passive loss limitations,a closely held C corporation is a C corporation where more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

Accepted Answer

A closely held C corporation is defined as a C corporation where more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year for purposes of the application of the passive loss limitations.

Question 11

A taxpayer may deduct suspended losses of a passive activity when the taxpayer completely terminates his or her ownership of the activity.

Accepted Answer

According to the IRS, a taxpayer can deduct all of the remaining suspended losses from a passive activity in the year that their ownership in the activity is completely disposed of. This means that if you sell or transfer the entire interest in the passive activity, you can take a deduction for any suspended losses.

Question 12

A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.

Accepted Answer

A passive activity is defined as any rental activity or any trade or business in which the taxpayer does not materially participate.

Question 13

Once an activity has been classified as passive,it is considered passive with regard to that taxpayer until it is sold.

Accepted Answer

The answer of Once an activity has been classified as...

Question 14

Partnerships and S corporations must identify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

Accepted Answer

Partnerships and S corporations are pass-through entities, which means that their income or losses are passed onto their partners or shareholders. In order to comply with the passive activity rules, the entity must first determine the nature of each activity (active or passive) and then report the results of each activity separately to the partners or shareholders. This ensures that each individual partner or shareholder can properly report their share of income or losses on their tax returns.

Question 15

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

Accepted Answer

The answer of Taxpayers are allowed to recognize net passive...

Question 16

Sarah had a $30,000 loss on Section 1244 stock,a $15,000 loss on sale of a personal use automobile and a $8,000 loss on stock that is not classified as Section 1244.Without regard to net capital loss limitations,Sarah should recognize

Accepted Answer

The Section 1244 stock will result in an ordinary loss of $30,000. The sale of the personal use automobile will result in a nondeductible personal loss of $15,000. The loss on the other stock that is not Section 1244 will result in a capital loss of $8,000. Therefore, the total loss recognized will be an ordinary loss of $30,000 and a capital loss of $8,000.

Question 17

Amy,a single individual and sole shareholder of Brown Corporation,sold all of the Brown stock for $30,000.The stock basis was $150,000.Amy had owned the stock for 3 years.Brown Corporation meets the Section 1244 requirements.Amy has

Accepted Answer

Since the stock meets the requirements of Section 1244, Amy can deduct up to $50,000 ($100,000 for a joint return) of ordinary loss as a result of selling the stock. The remaining loss of $100,000 ($150,000 basis - $30,000 sales price - $50,000 ordinary loss) is a long-term capital loss. Therefore, the total loss is a $50,000 ordinary loss and a $70,000 long-term capital loss.

Question 18

All of the following are true of losses from the sale or worthlessness of small business corporation (Section 1244)stock with the exception of

Accepted Answer

The answer of All of the following are true of...

Question 19

Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.

Accepted Answer

Material participation in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.

Question 20

When applying the limitations of the passive activity rules,a taxpayer's AGI is classified into active income,portfolio income and passive income.For this purpose,portfolio income includes dividends,interest,annuities,and royalties.

Accepted Answer

Portfolio income includes dividends, interest, annuities, and royalties, among other things, and is a component of a taxpayer's AGI when applying the passive activity rules limitations.

Quiz 16: Losses and Bad Debts