Question 1

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 apply the passive activity rules at the partnership or S corporation level and report the results of their operations by activity to the partners or shareholders.

Question 2

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

Accepted Answer

When inventory is sold at a loss, it results in an ordinary loss. This type of loss can be used to offset ordinary income, reducing the taxpayer's tax liability.

Question 3

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 tax code.

Question 4

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

Accepted Answer

This statement is true. A capital loss occurs when the sale or exchange price of a capital asset is less than its purchase price.

Question 5

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 requirement is stated in Section 1244 of the Internal Revenue Code, which specifically designates individuals and partnerships as eligible stockholders for Section 1244 stock status. Other entities, such as corporations, are not eligible.

Question 6

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 7

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 8

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 includes dividends, interest, annuities, and royalties according to the passive activity rules.

Question 9

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

Accepted Answer

According to the IRS, two separate business operations conducted at the same location can be treated as separate activities under the passive activity rules if the taxpayer can demonstrate that they are not part of a larger, integrated trade or business. This determination is based on various factors, such as the degree of common ownership, management, and control between the activities.

Question 10

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 11

Individual taxpayers can offset portfolio income with passive losses.

Accepted Answer

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

Question 12

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

Accepted Answer

This is a correct statement according to the tax law. The amount of loss on the sale of property is determined by subtracting the adjusted basis of the property from the amount realized from the sale.

Question 13

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

Accepted Answer

The answer of The total worthlessness of a security results...

Question 14

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

According to the IRS, losses on the sale or exchange of property are deductible only if the property is used in a trade or business or held for investment. Personal losses, such as on the sale of a personal residence, are generally not deductible.

Question 15

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

Accepted Answer

In order to claim a loss on a tax return, the loss must first be realized through selling or disposing of the asset that resulted in the loss. Only then can it be deducted on a tax return.

Question 16

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 may be deducted in full in the year of disposition. This is allowed under the passive activity loss rules of the IRS.

Question 17

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 18

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 19

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

When a business or investment property is abandoned, the loss can be deducted as an ordinary loss up to the property's adjusted basis on the date of abandonment. This is allowed under the tax code.

Question 20

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...

Quiz 16: Losses and Bad Debts