Question 1

Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?

Accepted Answer

A) The interdependencies between the activities. 
B) The extent of common control. 
C) The extent of common ownership. 
D) The geographical location. 
E) All of the above are relevant factors.

Question 2

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Accepted Answer

A) True 
 B)False

Question 3

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

A) Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant. 
B) Maria can offset the $80,000 loss against the $150,000 of income from the retail store. 
C) Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years. 
D) Assuming Maria continues to hold the interest in the restaurant, she will always treat the losses as active. 
E) None of the above.

Question 4

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

A) Activities A, B, C, and D are all significant participation activities. 
B) Paula is a material participant with respect to Activities A, B, C, and D. 
C) Paula is not a material participant with respect to Activities A, B, C, and D. 
D) Losses from all of the activities can be used to offset Paula's active income. 
E) None of the above.

Question 5

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?

Accepted Answer

The answer of Purple Corporation, a personal service corporation, earns...

Question 6

In the current year, Lucile, who has AGI of $70,000 before considering rental activities, is active in three separate real estate rental activities and is in the 28% tax bracket. She had $15,000 of losses from Activity A, $25,000 of losses from Activity B, and income of $20,000 from Activity C. She also had $3,100 of tax credits from Activity A. Calculate her deductions and credits currently allowed and the suspended losses and credits.

Accepted Answer

The answer of In the current year, Lucile, who has...

Question 7

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

A) The computer consulting business is a passive activity but the apartment building is not. 
B) The apartment building is a passive activity but the computer consulting business is not. 
C) Both the apartment building and the computer consulting business are passive activities. 
D) Neither the apartment building nor the computer consulting business is a passive activity. 
E) None of the above.

Question 8

In 2016, Kelly earns a salary of $200,000 and invests $40,000 for a 20% interest in a partnership not subject to the passive activity loss rules. Through the use of $800,000 of nonrecourse financing, the partnership acquires assets worth $1 million. The activity produces a loss of $150,000, of which Kelly's share is $30,000. In 2017, Kelly's share of the loss from the partnership is $15,000. How much of the loss from the partnership can Kelly deduct?

Accepted Answer

The answer of In 2016, Kelly earns a salary of...

Question 9

What special passive activity loss treatment is available to real estate activities?

Accepted Answer

The answer of What special passive activity loss treatment is...

Question 10

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

A) Neither store is a passive activity. 
B) Both stores are passive activities. 
C) Only the bicycle rental store is a passive activity. 
D) Only the music store is a passive activity. 
E) None of the above.

Question 11

If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort, any loss from that activity is treated as an active loss that can offset active income.

Accepted Answer

A) True 
 B)False

Question 12

​During the current year, Ryan performs personal services as follows: 700 hours in his management consulting practice, 650 hours in a real estate development business, and 550 hours in an apartment leasing operation. He expects that losses will be realized from the two real estate ventures while his consulting practice will show a profit. Ryan files a joint return with his wife whose salary is $125,000. Discuss the character and treatment of the income and losses generated by these activities.

Accepted Answer

The answer of ​During the current year, Ryan performs personal...

Question 13

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

A) Leigh cannot deduct the $40,000 loss from the sporting goods store because she is not a material participant. 
B) Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store. 
C) Leigh will not be able to deduct any losses from the sporting goods store until future years. 
D) Leigh will not be able to deduct any losses from the sporting goods store until she has been retired for at least four years. 
E) None of the above.

Question 14

Barb borrowed $100,000 to acquire a parcel of land to be held for investment purposes and paid interest of $11,000 on the loan. She has AGI of $75,000 for the year. Other items related to Barb's investments include the following:
Interest and annuity
​
  ​ 
a.Determine Barb's current investment interest deduction, assuming she does not make any special election regarding the computation of investment income.​
b.Discuss the treatment of Barb's investment interest that is disallowed in the current year.​
c.What election could Barb make to increase the amount of her current investment interest deduction?

Accepted Answer

The answer of Barb borrowed $100,000 to acquire a parcel...

Question 15

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

A) $90,000 from last year and $50,000 from the current year. 
B) $100,000 from last year and $50,000 from the current year. 
C) $0 from last year and $0 from the current year. 
D) $50,000 from the current year. 
E) None of the above.

Question 16

Judy owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year. The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year. Her at-risk amount at the end of the year is $43,000.

Accepted Answer

A) True 
 B)False

Question 17

Jackson Company incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Jackson is a personal service corporation, it may deduct $34,000 of the passive activity loss.

Accepted Answer

A) True 
 B)False

Question 18

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

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 the above.

Question 19

Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

Accepted Answer

A) True 
 B)False

Question 20

Match the term with the correct response. More than one response may be correct.
a.Taxpayer devotes time aggregating more than 500 hours in all significant participation activities during the year.
b.Participates in making management decisions in a significant and bonafide sense.
c.One in which the individual's participation equals more than 100 hours during the year.
d.Taxpayer devotes time in the activity which constitutes substantially all of the participation in the activity of all individuals.
e.Both options a. and d. are correct.
f.No correct choice is given.
-Significant participation activity.

Accepted Answer

The answer of Match the term with the correct response....

Exam 11: Investor Losses

Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

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?

What special passive activity loss treatment is available to real estate activities?

If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort, any loss from that activity is treated as an active loss that can offset active income.

Judy owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year. The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year. Her at-risk amount at the end of the year is $43,000.

Jackson Company incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Jackson is a personal service corporation, it may deduct $34,000 of the passive activity loss.

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.

Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.