Question 1

The total worthlessness of a security results in an ordinary loss.

Accepted Answer

False

Question 2

A loss incurred on the sale or exchange of property is deductible only if the property is used in a trade or business or held for investment.

Accepted Answer

This statement is true according to the IRS. Losses incurred on the sale or exchange of property are generally only deductible if the property is used in a trade or business, or held for investment purposes. Personal losses, such as those from the sale of a primary residence, are usually not deductible.

Question 3

One of the requirements which must be met for stock to be considered Section 1244 stock is that the stock must be owned by an individual or a partnership.

Accepted Answer

This is true. According to the Internal Revenue Service (IRS), to qualify as Section 1244 stock, the stock must be issued by a domestic corporation and must be owned by an individual or a small business corporation (a corporation that is not a member of an affiliated group and has not more than 50 shareholders).

Question 4

A capital loss may arise from the sale or exchange of a capital asset.

Accepted Answer

This is true. A capital loss happens when the selling price of a capital asset is less than its original cost, resulting in a loss on the investment.

Question 5

Once an activity has been classified as passive,it is considered passive with regard to that taxpayer until it is sold.

Accepted Answer

The answer of Once an activity has been classified as...

Question 6

If a taxpayer disposes of an interest in a passive activity,unused carryover losses are available to the purchaser of the interest.

Accepted Answer

The answer of If a taxpayer disposes of an interest...

Question 7

In order to be recognized and deducted on a tax return,a loss must first be realized.

Accepted Answer

This is true, as a loss must be realized or recognized before it can be deducted on a tax return. This means that the loss must have actually occurred, rather than being a potential or anticipated loss. Once the loss has been realized, it can then be used to offset any capital gains on the tax return.

Question 8

A taxpayer may deduct suspended losses of a passive activity when the taxpayer completely terminates his or her ownership of the activity.

Accepted Answer

When a taxpayer completely terminates his or her ownership of a passive activity, any suspended losses from that activity can be deducted in the year of disposition.

Question 9

A loss on business or investment property which is abandoned is deductible as an ordinary loss to the extent of the property's adjusted basis on the date of abandonment.

Accepted Answer

If business or investment property is abandoned, the taxpayer can claim a deduction for an ordinary loss to the extent of the property's adjusted basis on the date of abandonment. However, if the property is later sold or otherwise disposed of, any gain or loss will be treated as a capital gain or loss, not as an ordinary loss.

Question 10

When applying the limitations of the passive activity rules,a taxpayer's AGI is classified into active income,portfolio income and passive income.For this purpose,portfolio income includes dividends,interest,annuities,and royalties.

Accepted Answer

This statement is true. Portfolio income does include dividends, interest, annuities, and royalties when classifying a taxpayer's AGI for the purposes of applying passive activity rules.

Question 11

One of the requirements which must be met for stock to be considered Section 1244 stock is that the corporation cannot have more than $10 million of total paid in capital as of the stock issuance.

Accepted Answer

The answer of One of the requirements which must be...

Question 12

Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules.

Accepted Answer

The passive activity rules determine how a taxpayer can use losses from passive activities to offset income from other sources. Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules if they are not part of a larger, integrated business operation. This can allow each activity to be evaluated separately for purposes of the passive activity loss rules.

Question 13

Losses from passive activities that cannot be deducted currently are carried over for up to 5 subsequent years.

Accepted Answer

The answer of Losses from passive activities that cannot be...

Question 14

The destruction of a capital asset by a casualty gives rise to a capital rather than ordinary loss.

Accepted Answer

The answer of The destruction of a capital asset by...

Question 15

Losses incurred in the sale or exchange of personal-use property are deductible as capital losses.

Accepted Answer

The answer of Losses incurred in the sale or exchange...

Question 16

The sale of inventory at a loss results in an ordinary loss.

Accepted Answer

When inventory is sold at a price lower than its cost, the difference between the cost and selling price results in a loss. This loss is considered an ordinary loss and can be deducted from the business's taxable income.

Question 17

Partnerships and S corporations must identify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

Accepted Answer

Partnerships and S corporations must follow the passive activity rules and report the results of their operations by activity to partners/shareholders.

Question 18

A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.

Accepted Answer

A passive activity is defined as any rental activity or any trade or business in which the taxpayer does not materially participate according to the IRS.

Question 19

Individual taxpayers can offset portfolio income with passive losses.

Accepted Answer

The answer of Individual taxpayers can offset portfolio income with...

Question 20

The amount of loss realized on the sale of property is computed by subtracting adjusted basis from amount realized.

Accepted Answer

This is the correct formula for calculating the amount of loss realized on the sale of property. The adjusted basis is subtracted from the amount realized to determine if there is a loss or gain on the sale.

Quiz 8: Losses and Bad Debts