Question 1

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 at-risk 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 2

Wolf Corporation has active income of $55,000 and a passive activity 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

False

Question 3

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 4

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 5

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 6

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

Sherri can only deduct losses up to the amount she has at risk, which is $20,000, not the full $32,000 loss.

Question 7

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive activity 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

Since Kelly sold the activity at a loss and has no other passive activities, the suspended passive activity loss of $44,000 becomes fully deductible in the year of sale.

Question 8

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 9

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 activity loss.

Accepted Answer

A closely held C corporation may deduct up to $25,000 of passive activity losses against active or portfolio income. However, since Gray Company's active income is only $34,000, they may deduct the full $34,000 of the passive activity loss. This exception applies to non-personal service corporations only.

Question 10

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 activity loss.

Accepted Answer

Personal service corporations are subject to the passive activity loss rules, which generally do not allow the deduction of passive activity losses against active or portfolio income. The $34,000 of active income cannot be used to offset the $50,000 passive activity loss.

Question 11

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 12

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

Since Dick participated for 90 hours during the year, which exceeds the IRS requirement of 500 hours to be considered a material participant, he is a material participant.

Question 13

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 offset her portfolio income with the losses from Activity A, reducing her overall taxable income. However, if Activity A is classified as passive, she may not be able to use the losses to offset her portfolio income.

Question 14

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

Accepted Answer

If Activity A is passive, Nathan can offset the passive income from Activity A with the passive activity losses from Activity B, potentially reducing his taxable income.

Question 15

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 16

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 IRS rules, a taxpayer who spends more than 500 hours in a business or rental activity is considered a material participant.

Question 17

Tomas 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 described as "active," indicating that Tomas is actively involved in managing and operating them.

Question 18

Oriole Corporation has active income of $45,000 and a passive activity 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

The exception for deducting passive activity losses only applies to certain types of passive activities, not personal service corporations. Therefore, Oriole cannot deduct the $23,000 loss in this case.

Question 19

Aram 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

Aram's at-risk amount should have decreased by the portion of the partnership's recourse debt for which she is personally liable. In this case, 20% of the $50,000 loan would be $10,000, so her at-risk amount at the end of the year should be $35,000 - $10,000 + $40,000 = $65,000. The given amount of $43,000 is incorrect.

Question 20

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 at-risk amount is reduced below zero as a result of the debt restructuring.

Accepted Answer

When an activity converts from recourse to nonrecourse financing, the amount of debt that is considered at-risk decreases. If this decrease causes the at-risk amount to fall below zero, the taxpayer may be required to recapture previously allowed losses.

Quiz 11: Investor Losses