Question 1

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

Since Jenny actively participates in both stores and spends significant time working in each one, neither store would qualify as a passive activity under IRS rules. The fact that she elected not to group them together as a single activity also supports the assertion that they are both active.

Question 2

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2018.His loss from the activity in 2018 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 2019.Under the passive activity loss rules, Art's suspended loss at the end of 2019 is:

Accepted Answer

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

Question 3

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 4

Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year.He has one employee who works part-time in the business.

Accepted Answer

To be considered a material participant, an individual must participate in the activity for more than 500 hours during the year. Ned participates for 600 hours, which meets this requirement. The fact that he has an employee who participates for 2,000 hours does not affect his own material participation status.

Question 5

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

The suspended passive activity loss with respect to Activity B is $40,000 ($100,000 - $60,000). Since Josh's at-risk amount in Activity A is $10,000, all of Activity A's income is currently deductible and there is no suspended passive activity loss. Therefore, the total suspended passive activity loss is $40,000.

Question 6

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 generates a loss, the at-risk amount decreases by the amount of the loss. Since Sandra's activity was profitable in the first two years, her at-risk amount increased by $300,000. However, with the $100,000 loss from last year, her at-risk amount decreased to $200,000 ($300,000 - $100,000). In the current year, she incurs an additional loss of $50,000, bringing her total suspended passive activity loss to $150,000 ($100,000 from last year and $50,000 from the current year). Therefore, the correct answer is B, which states that the suspended passive activity loss is $100,000 from last year and $50,000 from the current year.

Question 7

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's at-risk amount of $25,000 is less than his current loss of $35,000, resulting in a suspended loss of $10,000 under the at-risk rules. Because he has no passive activity income, the entire $35,000 loss is suspended under the passive activity loss rules. Therefore, statement D is incorrect as it incorrectly identifies the amount of loss suspended under the rules.

Question 8

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 9

When Kate died, she owned 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 heir's adjusted basis in inherited property is its fair market value at the date of the decedent's death, which is $130,000. The suspended losses of $45,000 reduce the fair market value for the purpose of calculating the final deduction, resulting in a final deduction of $15,000 ($130,000 - $115,000).

Question 10

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

The at-risk amount is reduced by the current year's losses, so Vic's at-risk amount is now $120,000 ($200,000 - $80,000). Since he had no passive activity income during the year, the entire $80,000 loss is suspended and can be carried forward to future years.

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 is no longer a material participant in the restaurant activity, she can offset the loss against her income from the retail store since she is still a partner in both activities. The fact that she has been a material participant for 20 years also indicates that she meets the at-risk rules and can deduct the loss. Option A is incorrect because Maria was a material participant for 20 years and can therefore take the deduction. Option C is incorrect because there is no requirement for a three-year period of retirement. Option D is incorrect because whether the losses are treated as active or passive depends on Maria's level of participation, which is no longer material for the restaurant but still is for the retail store.

Question 12

Paula owns four separate activities.She elects not to group them together as a single activity under the "appropriate economic unit" standard.Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D.She has one employee, who works 125 hours in Activity D.Which of the following statements is correct?

Accepted Answer

None of the statements A, B, C, or D is correct because Paula's participation in each activity does not meet the IRS thresholds for material participation or significant participation activities on its own, and without grouping them, each activity's hours are considered separately. Material participation generally requires more than 500 hours of participation per activity, or meeting one of the other specific criteria that Paula does not appear to meet based on the information provided.

Question 13

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

Dena meets the material participation test for Activities B, C, D, and E because she has participated for more than 100 hours in each of these activities. However, there is not enough information to determine if she meets the material participation test for Activity A. Therefore, options A, B and C are not correct.

Question 14

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 and that 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 are 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, making the income and losses from these ventures considered active and not subject to passive activity loss limitations.

Question 15

Rick, a computer consultant, owns a separate business (not real estate) in which he participates.He has one employee who works part-time in the business.

Accepted Answer

The answer of Rick, a computer consultant, owns a separate...

Question 16

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 the apartment building and the computer consulting business, as he spends significant time (more than 500 hours in each activity) operating them. This level of participation classifies both activities as non-passive.

Question 17

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

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

Question 18

Ahmad owns four activities.He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D.Which of the following statements is correct?

Accepted Answer

The answer of Ahmad owns four activities.He participated for 120...

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 taxpayers to deduct up to $25,000 of passive activity loss if they actively participate in the real estate rental activity, but this is phased out by 50% of the amount by which the taxpayer's modified adjusted gross income exceeds $100,000. Josie's MAGI is $155,000, which is $55,000 over the threshold, reducing her maximum deductible amount by $27,500 ($55,000 * 50%). Since this exceeds the $25,000 limit, she can't take the full deduction. However, she doesn't lose the entire deduction because the phaseout starts at $100,000. The correct deduction before phaseout would be $25,000, but given her income level, she is phased out completely, making the correct answer $0, which contradicts the initial explanation. The correct interpretation should be that Josie can deduct $10,000 of her passive activity loss because the phaseout does not eliminate her ability to take a deduction entirely; it only reduces the amount she can deduct. Given the specifics of the scenario and the standard IRS rules, there seems to be a misunderstanding in the explanation provided. The correct deduction is based on the specific phaseout rules and the amount of income and loss reported.

Question 20

Leigh, who owns a 50% interest in a sporting goods store, was a material participant in the activity for the last 15 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

Because Leigh was a material participant in the sporting goods store activity for over 15 years, she is allowed to use up to $25,000 of losses from that activity to offset income from other activities, as long as her modified adjusted gross income does not exceed $100,000. Since she is a material participant in the office supply store activity, she can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store. Therefore, she can deduct $40,000 of the loss in the current year.

Quiz 6: Losses and Loss Limitations