Question 1

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 Tax Code section 469(c)(7). However, if the taxpayer's AGI is over $100,000, the amount of the deduction is reduced and eventually phased out completely at an AGI of $150,000.

Question 2

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

Accepted Answer

Unused carryover losses from a passive activity are personal to the taxpayer and cannot be transferred to the purchaser of the interest.

Question 3

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 now 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 4

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

Accepted Answer

Amy can claim a $50,000 ordinary loss under Section 1244 and the remaining $70,000 as a long-term capital loss (LTCL).

Question 5

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 passive activity rules, two separate business operations conducted at the same location may be treated as separate activities if they are not commonly controlled. This means that if the businesses are operated independently and have no significant overlap in management or ownership, then they may be treated as separate activities for the purposes of the passive activity rules.

Question 6

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 7

Partnerships and S corporations must classify 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 must apply the passive activity rules at their level and report the results by activity to partners or shareholders.

Question 8

Individual taxpayers can offset interest and dividend income with passive losses.

Accepted Answer

Interest and dividend income is considered portfolio income, which cannot be offset by passive losses. Passive losses can only offset passive income.

Question 9

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

Accepted Answer

Taxpayers can generally only offset passive losses against passive income, with certain exceptions like the $25,000 special allowance for rental real estate activities, subject to income limitations.

Question 10

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

Accepted Answer

Losses from passive activities that cannot be deducted currently are carried over indefinitely until they can be used to offset passive income or until the property is disposed of.

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

When a taxpayer completely terminates his or her ownership of a passive activity, any suspended losses from that activity can be deducted in the year of the disposition. This rule applies whether the activity is disposed of by sale, exchange, or other disposition.

Question 12

Joy reports the following income and loss: $$\begin{array} { | l | r | } 
\hline \text { Salary } & \$ 120,000 \
\hline \text { Income from activity A } & 60,000 \
\hline \text { Loss from activity B } & ( 35,000 ) \
\hline \text { Loss from activity C } & ( 55,000 ) \
\hline
\end{array}$$ Activities A,B,and C are all passive activities.
Based on this information,Joy has

Accepted Answer

The answer of Joy reports the following income and loss:...

Question 13

Rex has generated $150,000 of AGI this year due to salary,interest income and dividends.Rex is a single taxpayer.He plans to sell his shares of Trisco Inc.,a qualifying small business corporation under Sec.1244,realizing a $110,000 loss.Rex has not sold any other investment assets this year.Due to the sale of the Trisco stock,he will reduce his AGI by

Accepted Answer

The answer of Rex has generated $150,000 of AGI this...

Question 14

A closely held C corporation's passive losses may offset its portfolio income.

Accepted Answer

The answer of A closely held C corporation's passive losses...

Question 15

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

This statement is correct. Portfolio income does include dividends, interest, annuities, and royalties for the purposes of categorizing a taxpayer's AGI under the passive activity rules.

Question 16

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

According to the IRS, material participation in a passive activity can also be established by participating in the activity for more than 100 hours during the year and it must be more than anyone else involved in the activity.

Question 17

During the year,Mark reports $90,000 of active business income from his law practice.He also owns two passive activities.From Activity A,he earns $20,000 of income,and from Activity B,he incurs a $30,000 loss.As a result,Mark

Accepted Answer

Passive losses can only offset passive income. Mark's $30,000 loss from Activity B can offset the $20,000 income from Activity A, resulting in a net passive loss of $10,000, which is carried over. His AGI is based on his active income of $90,000.

Question 18

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 by the taxpayer than material participation. Material participation requires the taxpayer to participate in the rental activity on a regular, continuous, and substantial basis. Active participation only requires the taxpayer to make management decisions such as approving tenants, setting rent, and approving repairs.

Question 19

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. This means that they are not actively involved in managing the activity on a regular, continuous, and substantial basis, and are generally not eligible to deduct losses from these activities against other forms of income.

Question 20

For purposes of the application of the passive loss limitations,a closely held C corporation is a C corporation in which 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

This is the definition of a closely held C corporation for purposes of the application of the passive loss limitations under the tax code.

Quiz 25: Losses and Bad Debts