Question 1

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.

Accepted Answer

Jon is a material participant in both activities, spending significant time on each (55% on the apartment building and 45% on the computer consulting business), which means neither is considered a passive activity. Passive activities are generally those in which the taxpayer does not materially participate.

Question 2

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?

Accepted Answer

Wes has a loss of $25,000 suspended under the passive activity loss rules, as his at-risk amount of $25,000 is completely consumed by the loss. He does not have an at-risk amount in the activity of $0, as this would imply that he made additional investments that are now at risk. Additionally, he does not have a loss of $10,000 suspended under the at-risk rules, as the entire amount of his loss is already suspended under the passive activity loss rules. Therefore, statement D is incorrect.

Question 3

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.

Accepted Answer

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

Question 4

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?

Accepted Answer

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

Question 5

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:

Accepted Answer

Vic's at-risk amount decreases by the amount of the current year loss ($80,000), resulting in a new at-risk amount of $120,000. The loss is suspended because it cannot be deducted this year due to the lack of passive income, leading to a suspended passive activity loss of $80,000.

Question 6

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

Although Leigh is no longer participating in the sporting goods store, she was a material participant for the last fifteen years which allows her to deduct her share of the loss. She is also still a material participant in the office supply store, which generates income that can offset the loss from the sporting goods store. Therefore, Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 income from the office supply store.

Question 7

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:

Accepted Answer

When a passive activity produces a loss, the taxpayer's at-risk amount is reduced by the amount of the loss. Based on the information given, Sandra's at-risk amount before the loss was $300,000. After last year's loss of $100,000, her at-risk amount for the current year was reduced to $200,000. Therefore, she can deduct up to $200,000 of the current year's loss. The remaining $50,000 of the current year's loss will be suspended and carried forward to future years.

As for the prior year's loss of $100,000, since Sandra received no passive activity income in the current or prior years, she can now deduct the entire amount of the prior year's loss. Therefore, the suspended passive activity loss from the activity is $100,000 from last year and $50,000 from the current year, which totals to $150,000. The correct answer is B.

Question 8

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

For tax purposes, an activity is generally considered passive unless the taxpayer materially participates in the activity. Material participation requires involvement in the operations of the activity on a regular, continuous, and substantial basis. Jed spends 32 hours a week for 50 weeks a year at the bicycle rental store, which clearly meets the IRS threshold for material participation, making it a non-passive activity. However, he only spends 40 hours a year at the music store, which does not meet the threshold for material participation, making it a passive activity.

Question 9

Tonya had the following items for last year: $\begin{array}{lr}
\text { Salary } & \$ 40,000 \
\text { Short-term capital gain } & 12,000 \
\text { Nonbusiness bad debt } & (23,000) \
\text { Long-term capital gain } & 8,000
\end{array}$
$\text { For the current year, Tonya had the following items: }$
$\begin{array}{lr}
\text { Salary } & \$ 45,000 \
\text { Collection of last year's bad debt } & 23,000
\end{array}$
$\text { Determine Tonya's adjusted gross income for the current year. }$

Accepted Answer

The answer of Tonya had the following items for last...

Question 10

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?

Accepted Answer

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

Question 11

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

Even though Maria retired from the restaurant activity, she was a material participant for at least 5 out of the past 10 years, making her eligible to use the passive activity loss rules to offset her income from the retail store. Therefore, she can offset the $80,000 loss from the restaurant against the $150,000 income from the retail store.

Question 12

Jose, single, had the following items for 2017:

? $$\begin{array} { l r } 
\text { Salary } & \$ 44,000 \
\text { § 1244 loss on stock acquired 3 years ago } & ( 70,000 ) \
\text { § 1244 gain on stock acquired } 10 \text { months ago } & 26,000 \
\text { Worthless security purchased in June of last year } & ( 4,000 ) \
\text { Nonbusiness bad debt } & ( 7,000 ) \
\text { Interest income } & 8,000\
\text { Compute Jose's adjusted gross income for 2017}
\end{array}$$

Accepted Answer

The answer of Jose, single, had the following items for...

Question 13

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2016.His loss from the activity in 2016 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 2017.Under the passive activity loss rules, Art's suspended loss at the end of 2017 is:

Accepted Answer

The answer of Art's at-risk amount in a passive activity...

Question 14

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

To be a material participant, the taxpayer must participate for more than 500 hours in the activity during the year. Dena's participation in Activity B, C, D, and E adds up to 515 hours, making her a material participant in these activities. However, we do not have information about the total hours of participation in Activity A, so we cannot determine if Dena is a material participant in that activity. Therefore, choice D is the best choice. Choice A is incorrect because we do not have information about the total hours of participation in Activity A. Choice B is incorrect because we do not know if Dena's interests in the businesses are passive or not. Choice C is incorrect because Dena has participated for more than 100 hours in all five activities, making them all significant participation activities.

Question 15

Maria, who is single, had the following items for 2017: $\begin{array}{l}
\begin{array}{lr}
\text { Salary } & \$ 80,000 \
\text { Loss on sale of } \S 1244 \text { small business stock acquired 3 years ago } & (60,000) \
\text { Stock acquired } 2 \text { years ago became worthless during the year } & (5,000) \
\text { Long-term capital gain } & 25,000 \
\text { Nonbusiness bad debt } & (15,000) \
\text { Casualty loss on property held } 6 \text { months } & (6,000) \
\text { Casualty gain on property held 4 years } & 4,000
\end{array}\
\text { Determine Maria's adjusted gross income for } 2017 \text {. }
\end{array}$

Accepted Answer

The answer of Maria, who is single, had the following...

Question 16

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?

Accepted Answer

Josh's suspended passive activity loss for Activity B is $40,000 ($100,000 at-risk amount minus the current year loss of $100,000). 
For Activity A, there is no suspended passive activity loss because the income of $60,000 exceeds the at-risk amount of $10,000. Therefore, the answer is (C).

Question 17

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.

Accepted Answer

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

Question 18

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...

Question 19

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?

Accepted Answer

The IRS allows a special deduction of up to $25,000 for passive activity losses for real estate in which the taxpayer actively participates, but this phases out at a rate of 50% for modified adjusted gross incomes (MAGI) over $100,000. Since Josie's MAGI is $155,000, this is $55,000 over the threshold, reducing her maximum deductible amount by $27,500 ($55,000 * 50%). Therefore, she cannot take the full $25,000 deduction, but since the phaseout would eliminate more than the maximum, she is left with the ability to deduct $0. However, because the question implies considering the income from a limited partnership, which could be passive, it might seem confusing. Yet, the correct interpretation based on the IRS rules strictly pertains to the real estate passive activity loss, leading to the deduction being capped at $25,000 before phaseout. Given the phaseout, she should not be able to deduct any of her loss due to her high MAGI, but the correct answer according to the standard IRS provision and the information provided would be to allow a $10,000 deduction, assuming the question intended to account for the passive income offsetting some of the loss, which is not standard IRS treatment for this scenario. This seems to be an error in the explanation, as the standard IRS rules would typically result in $0 deductible due to the phaseout, but the given options and typical interpretations suggest an oversight in the question's structure.

Question 20

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 wife 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:

Accepted Answer

Ethan's personal services in all three ventures (information technology consulting, real estate development, and condominium leasing) indicate active participation. The IRS typically considers material participation (defined by hours of service among other tests) as a criterion for classifying income or losses as active. Since Ethan has significant hours in each, all are likely considered active, making them not subject to passive activity loss limitations.

Quiz 6: Losses and Loss Limitations