Question 1

P is the sole shareholder as well as an employee of PQ Accounting Services Incorporated.The corporation concentrates on tax return preparation and preparation of monthly financial statements.P currently owns an interest in a limited partnership in which he expects to generate losses for the next several years.Assuming P transfers the interest in the partnership to the corporation, any losses of the partnership may be used to reduce the corporation's taxable income.

Accepted Answer

The tax losses from a partnership passed through to a corporation cannot be used to offset the corporation's other taxable income due to entity structure differences and tax regulations that prevent the direct use of pass-through losses to offset corporate income.

Question 2

This year T sold his interest in Century Properties, a limited partnership, for a gain of $40,000.At the time of the sale, T had suspended losses attributable to Century of $25,000.For the year, T also had a $32,000 loss from Mervin Gardens, another limited partnership interest.T will carry over the entire $32,000 loss from Mervin Gardens to the following year.

Accepted Answer

T can use the $25,000 of suspended losses from Century Properties to offset the gain from the sale of that interest, reducing the taxable gain to $15,000. The remaining $32,000 loss from Mervin Gardens can then be used to offset the $15,000 gain, leaving T with a $17,000 loss ($32,000 - $15,000) to carry over to the following year, not the entire $32,000.

Question 3

A regular C corporation that is owned by five unrelated parties is not subject to the passive loss rules.

Accepted Answer

The passive loss rules apply to all taxpayers, including C corporations, unless they qualify as closely held or personal service corporations, which have specific criteria.

Question 4

S owns a duplex, which she rents out on a long-term basis.Although she is actively involved in managing the property, no significant services are provided.During the year, S earned a salary of $70,000 and had interest income of $10,000.Assuming the rental activity generates a $20,000 loss, all of the loss may be used by S to reduce her salary and interest income.

Accepted Answer

According to the passive activity rules, taxpayers can use losses from rental real estate activities to offset income from other sources if they actively participate in the management of the property and have adjusted gross income (AGI) of $150,000 or less (subject to phased-out limitations). Since S actively manages the property and has AGI within the limit, she can use the $20,000 loss to reduce her salary and interest income.

Question 5

Rental activities and other trade or business activities cannot be aggregated since up to $25,000 of losses from certain rental activities may be deducted annually.

Accepted Answer

Rental activities are generally considered passive activities, and losses from these activities can be deducted up to $25,000 annually under certain conditions, but the IRS does allow for the aggregation of all rental real estate activities if the taxpayer qualifies as a real estate professional, making it possible under specific circumstances to treat rental and other trade or business activities in a manner that allows for the combination of income and losses across activities.

Question 6

Deductible net operating losses occur only after the losses have survived the at-risk and passive loss rules.

Accepted Answer

Deductible net operating losses are losses that can be used to reduce taxable income in future years. However, they can only be used after they have survived certain limitations, such as the at-risk and passive loss rules.

Question 7

An activity that constitutes a rental for purposes of the passive loss rules is always passive regardless of the taxpayer's participation except when the exception for real estate developers applies.

Accepted Answer

This statement is true. According to the passive loss rules, an activity is considered rental if it involves the use of tangible property and the payment of rental expenses. Such rental activities are generally considered passive, regardless of the taxpayer's level of participation, unless they qualify for certain exceptions (such as the exception for real estate developers).

Question 8

Brian and his father-in-law formed Southern Sands Golf Club LLC.It is a daily fee course (not a private club).They advertise it as "your country club for a day." The activity would be considered a rental activity and automatically passive since they are renting the course for use of their patrons.

Accepted Answer

The activity would not be considered a rental activity and automatically passive because the IRS generally does not treat businesses that provide significant services in addition to the use of the property, such as a daily fee golf course offering services like golf cart rentals, caddies, and golf lessons, as rental activities. These are considered active business operations, not passive rental activities.

Question 9

B owns 10 hardware stores, each located in a different city.Since each store is located in a separate city he must treat each store as a separate activity.

Accepted Answer

The requirement to treat each store as a separate activity for tax or accounting purposes depends on various factors such as the legal structure of the business, tax regulations, and whether the stores are operated independently. Simply being in different cities does not automatically necessitate treating them as separate activities.

Question 10

During the year, Mr.Y joined together in a partnership with Ms.Z to form Pizza and Videos to Go.Mr.Y provided only the financial backing, while Ms.Z managed the operation.During the first year of operations, the partnership generated a loss.Mr.Y and Ms.Z may use their respective shares of the loss (in their entirety) to reduce their investment income.

Accepted Answer

Partnership losses can generally be used to offset other income on the partners' tax returns, but there are limitations. The ability to use these losses depends on the basis in the partnership, at-risk limitations, and passive activity loss rules. Simply having investment income does not automatically allow for the offset by partnership losses, especially if the losses are considered passive and the investment income is not.

Question 11

L is the sole shareholder and an employee of LDI Incorporated.The corporation manufactures custom-made kitchen cabinets.L currently owns an interest in a limited partnership in which he expects to generate losses for the next several years.Assuming L transfers the interest in the partnership to the corporation, any losses of the partnership may be used to reduce the corporation's operating income.

Accepted Answer

If L transfers the interest in the partnership to the corporation, the losses of the partnership can be used by the corporation to offset its income and reduce its taxable income. This is known as a tax loss carryforward. However, it is important to note that there are certain limitations and rules that must be followed when using tax loss carryforwards.

Question 12

Suspended losses from a passive activity can be deducted against portfolio and other income if the taxpayer sells his entire interest in the activity,

Accepted Answer

When a taxpayer sells their entire interest in a passive activity, any suspended losses from that activity can be deducted against portfolio and other income in the year of sale. However, if the taxpayer only sells a portion of their interest in the activity, the remaining suspended losses continue to be carried forward until the taxpayer either has taxable income from the activity or fully disposes of their interest in it.

Question 13

C is a C.P.A.and operates his own practice out of a seven story building that he owns.He rents out five floors and uses two for his own business.This year he had a loss of $30,000 from the rental side of his operations.His accounting practice netted a profit of $600,000.C may offset the $30,000 loss against the $600,000 profit from his business.

Accepted Answer

According to the IRS rules, C can offset the loss from his rental business against the profit from his accounting practice. This means that his taxable income will be reduced by the amount of the loss, resulting in a lower tax liability.

Question 14

Passive losses normally can be used to offset other passive income such as interest and dividends.

Accepted Answer

Passive losses can be used to offset passive income, but interest and dividends are typically considered portfolio income, not passive income, and thus cannot be offset by passive losses under tax regulations.

Question 15

A group of doctors own Glenbrook Manor LLC, which owns and operates a nursing home.The home has 130 units where its tenants live and receive skilled nursing care.Each tenant signs an annual lease.The LLC would automatically be considered a passive activity since it is a rental business.

Accepted Answer

The LLC is not just a rental business, but also provides skilled nursing care. Therefore, it is not automatically considered a passive activity. The doctors may need to meet certain requirements to avoid being classified as passive investors for tax purposes.

Question 16

D operates a small rental car agency by the airport.Most of his customers rent cars for one or two days.D's operation is not considered a rental activity for purposes of the passive loss rules.

Accepted Answer

According to the information provided, D's operation is not considered a rental activity for purposes of the passive loss rules. Therefore, the answer is True.

Question 17

During the year, J sold his interest in Sterling XXI, a limited partnership, for a gain of $30,000.At the time of the sale, J had suspended losses from Sterling of $50,000.For the year, J also had a loss from another passive activity of $35,000.As a result, J's taxable income will decrease by $50,000, and he will have a suspended loss of $5,000.

Accepted Answer

J's gain from selling his interest in Sterling XXI will offset $30,000 of his $50,000 suspended losses, leaving him with $20,000 of suspended losses. The loss from his other passive activity cannot be used to offset any of the suspended losses. Therefore, J's taxable income will not decrease by $50,000 and he will have a suspended loss of $20,000, not $5,000.

Question 18

Publicly traded corporations normally would not be subject to the passive loss rules.

Accepted Answer

This is true, as the passive loss rules only apply to individuals, estates, trusts, and closely held corporations. Publicly traded corporations are not considered closely held and are therefore exempt from the passive loss rules.

Question 19

A passive loss includes a loss from the sale of an investment such as stock of a publicly held company like IBM where the taxpayer is merely an investor and does not work for the company.

Accepted Answer

A passive loss typically refers to losses incurred from business activities in which the taxpayer does not materially participate, and does not include losses from the sale of investments like stocks of publicly held companies.

Question 20

During the year, Q, employed full time as an attorney, spent 550 hours managing an apartment complex he owns.The operation of the apartment complex is considered a passive activity

Accepted Answer

An attorney's work is not considered a passive activity, but managing an apartment complex is.

Quiz 12: Deductions for Certain Investment Expenses and Losses