Question 1

Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive activity loss from a real estate rental activity in which he actively participates.His modified adjusted gross income is $95,000.Of the $27,000 loss, how much is deductible?
A)$0
B)$10,000
C)$25,000
D)$27,000
E)None of the above

Accepted Answer

The answer of Pablo, who is single, has $95,000 of...

Question 2

In 2018, Liam invested $100,000 for a 25% interest in a partnership involved in an activity in which he is a material participant.The partnership reported losses of $340,000 in 2018 and $180,000 in 2019 with Liam's share being $85,000 in 2018 and $45,000 in 2019.How much of the losses can Liam deduct?
A)$0 in 2018, $0 in 2019.
B)$85,000 in 2018, $0 in 2019.
C)$85,000 in 2018, $15,000 in 2019.
D)$85,000 in 2018, $45,000 in 2019.
E)None of the above.

Accepted Answer

The answer of In 2018, Liam invested $100,000 for a...

Question 3

In the current year, Crow Corporation, a closely held C corporation that is not a personal service corporation, has $100,000 of passive activity losses, $80,000 of active business income, and $20,000 of portfolio income.How much of the passive activity loss may Crow deduct in the current year?
A)$0.
B)$20,000.
C)$80,000.
D)$100,000.
E)None of the above.

Accepted Answer

The answer of In the current year, Crow Corporation, a...

Question 4

Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity.Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000.How is her loss characterized?
A)$40,000 is suspended under the passive activity loss rules and $10,000 is suspended under the at-risk rules.
B)$40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive activity loss rules.
C)$50,000 is suspended under the passive activity loss rules.
D)$50,000 is suspended under the at-risk rules.
E)None of the above.

Accepted Answer

The answer of Rita earns a salary of $150,000, and...

Question 5

Jon owns an apartment building in which he is a material participant and also owns a computer consulting business.Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business.
A)The computer consulting business is a passive activity but the apartment building is not.
B)The apartment building is a passive activity but the computer consulting business is not.
C)Both the apartment building and the computer consulting business are passive activities.
D)Neither the apartment building nor the computer consulting business is a passive activity.
E)None of the above.

Accepted Answer

The answer of Jon owns an apartment building in which...

Question 6

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.
A)Neither store is a passive activity.
B)Both stores are passive activities.
C)Only the bicycle rental store is a passive activity.
D)Only the music store is a passive activity.
E)None of the above.

Accepted Answer

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

Question 7

During the current year, Ethan performs personal services as follows: 800 hours in his information technology consulting practice, 625 hours in a real estate development business, and 510 hours in a condominium leasing operation.He expects that losses will be realized from the two real estate ventures while his consulting practice will show a profit.Ethan files a joint return with his spouse whose salary is $125,000.The income and losses from the following ventures is considered active and not subject to the passive activity loss limitations:
A)Only the information technology consulting practice.
B)Only the information technology consulting practice and the real estate development business.
C)Only the information technology consulting practice and the condominium leasing operation.
D)All three of the ventures are considered active and not subject to the passive activity loss limitations.
E)None of the above.

Accepted Answer

The answer of During the current year, Ethan performs personal...

Question 8

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.
A)Leigh cannot deduct the $40,000 loss from the sporting goods store because she is not a material participant.
B)Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store.
C)Leigh will not be able to deduct any losses from the sporting goods store until future years.
D)Leigh will not be able to deduct any losses from the sporting goods store until she has been retired for at least four years.
E)None of the above.

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 affect her ability to offset losses from that store against income from the office supply store.

Question 9

Josh has investments in two passive activities.Activity A, acquired three years ago, produces income in the current year of $60,000.Activity B, acquired last year, produces a loss of $100,000 in the current year.At the beginning of this year, Josh's at-risk amounts in Activities A and B are $10,000 and $100,000, respectively.What is the amount of Josh's suspended passive activity loss with respect to these activities at the end of the current year?
A)$0
B)$36,000
C)$40,000
D)$100,000
E)None of the above

Accepted Answer

The suspended passive activity loss for activity B is limited to the at-risk amount of $100,000. Therefore, the suspended loss for activity B is $100,000 - $100,000 = $0.
For activity A, Josh has $60,000 of income and $10,000 of at-risk amount. This means he has a $50,000 ($60,000 - $10,000) passive activity loss from activity A that is not currently deductible due to at-risk limitations. 
Thus, the total suspended passive activity loss is $50,000 + $0 = $50,000.

Question 10

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.
A)Neither store is a passive activity.
B)Both stores are passive activities.
C)Only the bicycle rental store is a passive activity.
D)Only the music store is a passive activity.
E)None of the above.

Accepted Answer

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

Question 11

Which of the following decreases a taxpayer's at-risk amount?
A)Cash and the adjusted basis of property contributed to the activity.
B)Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity.
C)Taxpayer's share of amounts borrowed for use in the activity that is qualified nonrecourse financing.
D)Taxpayer's share of the activity's income.
E)None of the above.

Accepted Answer

The answer of Which of the following decreases a taxpayer's...

Question 12

Kate dies owning a passive activity with an adjusted basis of $100,000.Its fair market value at that date is $130,000.Suspended losses relating to the property were $45,000.
A)The heir's adjusted basis is $130,000, and Kate's final deduction is $15,000.
B)The heir's adjusted basis is $130,000, and Kate's final deduction is $45,000.
C)The heir's adjusted basis is $100,000, and Kate's final deduction is $45,000.
D)The heir's adjusted basis is $175,000, and Kate has no final deduction.
E)None of the above.

Accepted Answer

The answer of Kate dies owning a passive activity with...

Question 13

Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive activity loss from a real estate rental activity in which she actively participates.If her modified adjusted gross income is $155,000, how much of the $26,000 loss is deductible?
A)$0
B)$10,000
C)$25,000
D)$26,000
E)None of the above

Accepted Answer

The answer of Josie, an unmarried taxpayer, has $155,000 in...

Question 14

Wes's at-risk amount in a passive activity is $25,000 at the beginning of the current year.His current loss from the activity is $35,000 and he has no passive activity income.At the end of the current year, which of the following statements is incorrect?
A)Wes has a loss of $25,000 suspended under the passive activity loss rules.
B)Wes has an at-risk amount in the activity of $0.
C)Wes has a loss of $10,000 suspended under the at-risk rules.
D)Wes has a loss of $35,000 suspended under the passive activity loss rules.
E)None of the above is incorrect.

Accepted Answer

The correct statement is that Wes has a loss of $35,000 suspended under the passive activity loss rules. This is because his current loss of $35,000 exceeds his at-risk amount of $25,000, meaning that he cannot currently deduct the entire loss. The statement in option D incorrectly suggests that only a portion of the loss is suspended, when in fact the entire amount is suspended.

Question 15

Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year.His current loss from the activity is $80,000.Vic had no passive activity income during the year.At the end of the current year:
A)Vic has an at-risk amount in the activity of $120,000 and a suspended passive activity loss of $80,000.
B)Vic has an at-risk amount in the activity of $200,000 and a suspended passive activity loss of $80,000.
C)Vic has an at-risk amount in the activity of $120,000 and no suspended passive activity loss.
D)Vic has an at-risk amount in the activity of $200,000 and no suspended passive activity loss.
E)None of the above.

Accepted Answer

Vic's at-risk amount is reduced by the current year's loss, leaving him with $120,000 ($200,000 - $80,000). Since he had no passive activity income during the year, the passive activity loss of $80,000 is suspended and can be carried forward to future years. Therefore, choice A is correct.

Question 16

Sandra acquired a passive activity three years ago.Until last year, the activity was profitable and her at-risk amount was $300,000.Last year, the activity produced a loss of $100,000, and in the current year, the loss is $50,000.Assuming Sandra has received no passive activity income in the current or prior years, her suspended passive activity loss from the activity is:
A)$90,000 from last year and $50,000 from the current year.
B)$100,000 from last year and $50,000 from the current year.
C)$0 from last year and $0 from the current year.
D)$50,000 from the current year.
E)None of the above.

Accepted Answer

When a passive activity produces a loss, it may be limited by the at-risk rules or the passive activity loss rules. The at-risk rules limit the amount of loss deductible to the amount the taxpayer has at risk in the activity. The passive activity loss rules limit the amount of loss deductible against passive activity income. In this case, since Sandra has not received any passive activity income, the loss is limited by the passive activity loss rules.

Sandra's at-risk amount was $300,000 before the current year. However, since she has not made any additional investments into the activity, her at-risk amount remains at $300,000. Her loss for the prior year was $100,000, which means that $200,000 of her at-risk amount was used to offset the loss. This leaves her with an at-risk amount of $100,000 for the current year.

Since her loss for the current year is $50,000 and she has an at-risk amount of $100,000, she can use the entire $50,000 loss to offset her at-risk amount. The remaining $50,000 of her at-risk amount will carry over to the next year.

Therefore, the suspended passive activity loss from the activity is $100,000 from last year and $50,000 from the current year, which is answer choice B.

Question 17

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.
A)All five of Dena's activities are significant participation activities.
B)Dena is a material participant with respect to all five activities.
C)Dena is not a material participant in any of the activities.
D)Dena is a material participant with respect to Activities B, C, D, and E.
E)None of the above.

Accepted Answer

To be considered a material participant, an individual must participate in the activity for more than 500 hours during the year or participate for more than 100 hours and that participation is more than anyone else involved in the activity. In this scenario, Dena has participated for more than 100 hours in all five activities, but we do not know if her participation is significant in Activity A. Therefore, she is a material participant with respect to Activities B, C, D, and E.

Question 18

Caroyl made a gift to Tim of a passive activity adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000).No gift tax resulted from the transfer.
A)Tim's adjusted basis is $80,000, and Tim can deduct the $20,000 of suspended losses in the future.
B)Tim's adjusted basis is $80,000.
C)Tim's adjusted basis is $50,000, and the suspended losses are lost.
D)Tim's adjusted basis is $50,000, and Tim can deduct the $20,000 of suspended losses in the future.
E)None of the above.

Accepted Answer

The answer of Caroyl made a gift to Tim of...

Question 19

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2017.His loss from the activity in 2017 is $80,000, and he had no passive activity income during the year.Art had $20,000 of passive activity income from the activity in 2018.Under the passive activity loss rules, Art's suspended loss at the end of 2018 is:
A)$15,000.
B)$20,000.
C)$45,000.
D)$60,000.
E)None of the above.

Accepted Answer

Under the passive activity loss rules, any passive activity losses that are not currently deductible because of the at-risk or passive activity limitations become suspended losses. These suspended losses can be carried forward and used to offset passive activity income in future years or any gain from the sale of the activity.

In this case, Art had $80,000 of loss in 2017 in a passive activity where his at-risk amount was $60,000. This means that $20,000 of the loss was not currently deductible due to the at-risk limitation and became a suspended loss.

In 2018, Art had $20,000 of passive activity income from the same activity. He can use this income to offset some of the suspended loss from the previous year, leaving a remaining suspended loss of $60,000 ($80,000 loss in 2017 - $20,000 passive activity income in 2018). Therefore, the answer is D: $60,000.

Question 20

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.
A)Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant.
B)Maria can offset the $80,000 loss against the $150,000 of income from the retail store.
C)Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years.
D)Assuming Maria continues to hold the interest in the restaurant, she will always treat the losses as active.
E)None of the above.

Accepted Answer

Because Maria was a material participant in the restaurant activity for the last 20 years, she can still use any unused losses from the restaurant to offset income from other passive activities in which she is a material participant, such as the retail store. Therefore, she can offset the $80,000 loss against the $150,000 of income from the retail store.

Quiz 6: Losses and Loss Limitations

Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive activity loss from a real estate rental activity in which he actively participates.His modified adjusted gross income is $95,000.Of the $27,000 loss, how much is deductible?

In the current year, Crow Corporation, a closely held C corporation that is not a personal service corporation, has $100,000 of passive activity losses, $80,000 of active business income, and $20,000 of portfolio income.How much of the passive activity loss may Crow deduct in the current year?

Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity.Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000.How is her loss characterized?

Which of the following decreases a taxpayer's at-risk amount?

Kate dies owning a passive activity with an adjusted basis of $100,000.Its fair market value at that date is $130,000.Suspended losses relating to the property were $45,000.

Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive activity loss from a real estate rental activity in which she actively participates.If her modified adjusted gross income is $155,000, how much of the $26,000 loss is deductible?

Wes's at-risk amount in a passive activity is $25,000 at the beginning of the current year.His current loss from the activity is $35,000 and he has no passive activity income.At the end of the current year, which of the following statements is incorrect?

Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year.His current loss from the activity is $80,000.Vic had no passive activity income during the year.At the end of the current year:

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.

Caroyl made a gift to Tim of a passive activity adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000) .No gift tax resulted from the transfer.