Exam 11: Investor Losses

Purple Corporation, a personal service corporation, earns active income of $600,000. The corporation receives $60,000 in dividends and incurs a loss of $100,000 from an investment in a passive activity acquired three years ago. What is Purple's income after considering the passive investment?

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Question 1

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A personal service corporation cannot offset passive activity losses against active or portfolio income. Purple's income is $660,000 ($600,000 active income + $60,000 dividend income). The $100,000 passive activity loss is suspended.

Anne sells a rental house for $300,000 (adjusted basis of $255,000). During her ownership, $60,000 of losses have been suspended under the passive activity loss rules. Determine the tax treatment to Anne on the disposition of the property.

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Question 2

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Because Anne disposes of her entire interest in the passive activity, she is able to fully recognize the suspended losses. By utilization of the $60,000 suspended loss, a deductible loss of $15,000 results. $\begin{array} { l r } \text { Net sales price } & \$ 300,000 \\\text { Less: Adjusted basis } & \underline { ( 255,000 ) } \\\text { Total gain } & \$ 45,000 \\\text { Less: Suspended losses } & ( 60,000 ) \\\text { Deductible (nonpassive activity) loss } & \underline { ( \$ 15,000 ) } \\\end{array}$

Ramon incurred $83,100 of interest expense related to his investments this year. His investment income included $34,500 of interest and a $37,500 net capital gain on the sale of securities. Ramon has asked you to compute the amount of his deduction for investment interest, taking into consideration any options he might have. What is the maximum amount of Ramon's investment interest expense deduction in the current year?

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Question 3

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Lindsey, an attorney, earns $125,000 from her law practice in the current year. In addition, she receives $50,000 in dividends and interest during the year. Further, she incurs a loss of $40,000 from an investment in a passive activity. What is Lindsey's AGI for the year after considering the passive investment?

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Question 4

Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her spouse participates for 450 hours. Joyce qualifies as a material participant.

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Question 5

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.

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Question 6

Identify from the following list the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition.

(Multiple Choice)

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Question 7

Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?

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Question 8

Match the treatment for the following types of transactions. -Treatment of an installment sale of a passive activity.

(Multiple Choice)

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Question 9

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

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Question 10

Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?

(Multiple Choice)

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Question 11

Bob realized a long-term capital gain of $8,000. In calculating his net investment income, Bob may elect to include the gain in investment income.

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Question 12

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. A) All five of Dena's activities are significant participation activities. B) Dena is a material participant with respect to all five activities. C) Dena is not a material participant in any of the activities. D) Dena is a material participant with respect to Activities B, C, D, and E. E) None of these is correct.

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Question 13

Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate. He paid $30,000 for his interest. How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive activity loss rules?

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Question 14

Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules. During the first year, her share of the entity's loss was $120,000. At the beginning of the second year, the entity obtained $800,000 of recourse financing. Also during the second year, Sarah withdrew cash of $20,000, and her share of the entity's loss was $25,000. Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.

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Question 15

Raul is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land being held as an investment. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid and deducted $5,000 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Raul's maximum investment interest deduction for the year is:

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Question 16

Identify how the passive activity loss rules broadly classify various types of income and losses. Provide examples of each category.

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Question 17

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.

(Multiple Choice)

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Question 18

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.

(Multiple Choice)

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Question 19

Lew owns five activities, and he elects not to group them together as a single activity under the "appropriate economic unit" standard. During the year, he participates for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, 110 hours in Activity D, and 100 hours in Activity E. Which of the following statements is correct? A) Activities A, B, C, D, and E are all significant participation activities. B) Lew is a material participant in Activities A, B, C, and D only. C) Lew is a material participant in Activities A, B, C, D, and E. D) None of these.

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Question 20

Showing 1 - 20 of 130

Exam 11: Investor Losses

Purple Corporation, a personal service corporation, earns active income of $600,000. The corporation receives $60,000 in dividends and incurs a loss of $100,000 from an investment in a passive activity acquired three years ago. What is Purple's income after considering the passive investment?

Anne sells a rental house for $300,000 (adjusted basis of $255,000). During her ownership, $60,000 of losses have been suspended under the passive activity loss rules. Determine the tax treatment to Anne on the disposition of the property.

Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her spouse participates for 450 hours. Joyce qualifies as a material participant.

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.

Identify from the following list the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition.

Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?

Match the treatment for the following types of transactions. -Treatment of an installment sale of a passive activity.

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?

Bob realized a long-term capital gain of $8,000. In calculating his net investment income, Bob may elect to include the gain in investment income.

Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate. He paid $30,000 for his interest. How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive activity loss rules?

Identify how the passive activity loss rules broadly classify various types of income and losses. Provide examples of each category.

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.

Understanding and Working With the Federal Tax Law

Working With the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: in General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

Taxing Business Income

Accounting Periods and Methods

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

Partnerships

S Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Income Taxation of Trusts and Estates

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