Exam 7: Losses-Deductions and Limitations

Lu-Yin purchased her consulting business with $75,000 of her own funds and she borrowed $125,000 from the local bank. If she is personally responsible for the loan, she is at risk only for $50,000.

If a taxpayer has the following for the current year: ? Active Portfolio Passive Income \ 75,000 \ 22,000 \ 55,000 Deductions (45,000) (16,000) (110,000) Income(Loss) \ 30,000 \ 6,000 \ (55,000) I.If the taxpayer is a regular corporation, taxable income from the three activities is a loss of $19,000. II.If the taxpayer is an individual and the passive income is related to a rental real estate activity in which the taxpayer is an active participant, taxable income is $11,000. ?

Barry owns all of the stock of Jerrico Corporation; an internet based gaming firm. Barry is also the President of and works full-time for Jerrico. During the current year, Jerrico has a loss of $125,000 from its operations. i.If Jerrico is an S Corporation, Barry may deduct the loss on his personal tax return as a deduction for AGI.II.If Jerrico is a regular corporation, the corporation can carry the loss forward indefinitely to reduce taxable income in future years. ​

Sullivan, a pilot for Northern Airlines, has adjusted gross income of $92,000 before considering the following losses. The passive activity rules disallow the deduction for a loss in which of the following? I.Sullivan has a $4,500 loss from his ownership interest in Cowco, a feeder-cattle limited partnership. Sullivan is a general partner and is responsible for day-to-day management decisions. II.Sullivan has a $7,000 loss from his ownership interest in Swineco, a feeder-pig limited partnership. Sullivan is a limited partner. ​

The Corinth Corporation is incorporated in 2015 and had no capital asset transactions during the year. From 2015 through 2015, the company had the following capital gains and losses: ? 2015 2015 2017 2018 Capital Gains \ 18,000 \ 12,000 \ 20,000 \ 21,000 Capital Losses (7,000) (16,000) (26,000) (31,000) If Corinth's marginal tax rate during 2015 to 2017 was 34% and is 21% in 2018, what is the effect of Corinth's capital gains and losses on the amount of tax due each year?

If a corporation incurs a net operating loss of $10,000 in 2018, what would cause it not to deduct the entire $10,000 in 2019?

A taxpayer has the following income (losses) for the current year: ? Active Income Portfolio Income Passive Income \ 98,000 \ 22,000 \ (30,000) What is the taxable income (loss) of the taxpayer if: a.The taxpayer is a publicly held corporation? b.The taxpayer is a closely held corporation? c.The taxpayer is an individual and the passive income is not from a rental activity? d.The taxpayer is an individual and the passive income is the result of a rental activity for which the taxpayer qualifies as a real estate professional. e.The taxpayer is an individual and the passive income is the result of a rental activity for which the taxpayer fails to qualify as a real estate professional but meets the active participation test?

If an individual is not a material participant, a rental activity is considered passive. However, certain rental activities are not deemed to be rentals for passive loss purposes even if the individual is not a material participant. Which of the following is not excluded from the passive loss rules?

The Baskerville Corporation has a net $6,500 capital loss during the current taxable year. They will be able to deduct $3,000 this year and carries the remaining $3,500 forward.

Fowler sells stock he had purchased for $22,000 to his brother, Phil, for $15,000. What is the tax consequence of the sale to Fowler and Phil? Explain the three possible tax consequences if Phil sells the stock two years later to his neighbor?

Which of the following losses are generally deductible? I.Loss on the sale of a personal residence. II.Loss due to the theft of business inventory. ​

For each of the following situations, determine whether the item is deductible, and discuss any limitations, which might be placed on the deduction. a.Carl owns an office building that he rents out to various businesses. During the current year, rental income from the building is $95,000. Carl's allowable expenses relating to the office building are $150,000. b.Edward sells stock to an unrelated party at a $70,000 loss during the current year. c.Lee sold furniture at a loss of $5,000 during the current year.

Rose has an adjusted gross income of $130,000. Not included in her adjusted gross income is a $15,000 loss from a passive activity. Which of the following statements regarding the effect of the passive loss on his adjusted gross income is/are correct? I.If the activity is rental real estate and Rose meets the real estate professional exception, she can deduct the $15,000 loss for adjusted gross income. II.If the activity is rental real estate and Rose is an active participant, she can deduct $5,000 of the loss for adjusted gross income. ​

John discovers that termites have destroyed the front porch of his office building. The damage occurred over a 3-year period. He is eligible for a casualty loss deduction.

Match each statement with the correct term below. -Passive activity

In April of the current year, Speedy Printing Company's delivery van is stolen. The van was originally purchased in 2011 for $13,000, and its fair market value at the time of the theft is $4,000. The van has a zero adjusted basis on the books of Speedy. The previous year, Speedy dropped theft insurance on the van, so it receives no compensation for the loss from its insurance company. What amount of loss can Speedy deduct?

Anna owns a passive activity that has a basis of $30,000 and a suspended loss of $7,000. Anna gifts the passive activity to her daughter Patricia when the property has a fair market value of $42,000. I.Anna will report an ordinary loss of $7,000. II.Patricia's basis in the passive activity is $30,000. ​

Match each statement with the correct term below. -Transaction loss

Ronald is exploring whether to open a franchise of Quick Tax. He plans on forming an S corporation and investing $15,000 of his own money while borrowing $45,000 from the bank to finance the purchase of the necessary computing equipment and software. The bank has proposed two financing options. Under the first option, the interest rate is only 10%, but the loan is recourse. The second option increases the interest rate to 15%, but the loan is nonrecourse. a.Discuss the tax and non-tax aspects of the two options. b.If Ronald incurs a $20,000 loss in the first year of operations, how much, if any, of the loss can he deduct if the loan is recourse? Nonrecourse?

Nancy is the owner of an apartment complex. She actively participates in the management of the building. During the current year, it generates a taxable loss of $27,000. Nancy's other sources of income are salary of $52,000 and interest of $21,000. What is Nancy's allowable loss from the apartment?