Question 1

In 2017,Emily invests $120,000 in a limited partnership that is not a passive activity.During 2017,her share of the partnership loss is $90,000.In 2018,her share of the partnership loss is $50,000.How much can Emily deduct in 2017 and 2018?

Accepted Answer

Although the passive activity loss rules do not apply,the at-risk rules limit Emily's deductions.She can deduct $90,000 in 2017 and her at-risk amount will be reduced to $30,000 ($120,000 - $90,000 deducted).She will be limited to a $30,000 deduction in 2018 unless she increases her amount at risk.For example,if Emily invests an additional $20,000 in 2018,her at-risk amount would be $50,000 ($30,000 balance + $20,000 additional investment),and she would be able to deduct the entire $50,000 loss in 2018.

Question 2

Eric makes an installment sale of a passive activity having suspended losses of $40,000.He collects 25% of the sales price in the current year,and will collect 25% in each of the next three years.Eric can deduct $10,000 of the passive activity loss this year.

Accepted Answer

A) True 
 B)False  True

Question 3

Gray Company,a closely held C corporation,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 Gray is not a personal service corporation,it may deduct $34,000 of the passive activity loss.

Accepted Answer

A) True 
 B)False  True

Question 4

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2016.His loss from the activity in 2016 is $80,000,and he had no passive activity income during the year.Art had $20,000 of passive activity income from the activity in 2017.Under the passive activity loss rules,Art's suspended loss at the end of 2017 is:

Accepted Answer

A)  $15,000.
B)  $20,000.
C)  $45,000.
D)  $60,000.
E)  None of the above.

Question 5

​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 services...

Question 6

In the current year,Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner.If she is an active participant and if her modified AGI is $100,000,she can deduct $25,000 of the loss.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

The answer of Identify how the passive activity loss rules...

Question 8

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 9

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 10

Ahmad owns four activities.He participated for 120 hours in Activity A,150 hours in Activity B,140 hours in Activity C,and 100 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)  Activities A, B, and C are significant participation activities.
C)  Ahmad is a material participant with respect to Activities A, B, and C.
D)  Ahmad is a material participant with respect to Activities A, B, C, and D.
E)  None of the above.

Question 11

In 2017,Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant.The partnership incurs a loss with $100,000 being Arnold's share.Which of the following statements is incorrect?

Accepted Answer

A)  Since Arnold has only $80,000 of capital at risk, he cannot deduct any more than this amount against his other income.
B)  Arnold's nondeductible loss of $20,000 can be carried over and used in future years (subject to the at-risk provisions) .
C)  If Arnold has taxable income of $40,000 from the partnership in 2018 and there are no other transactions that affect his at-risk amount, he can use all of the $20,000 loss carried over from 2017.
D)  Arnold's $100,000 loss is nondeductible in 2017 and 2018 under the passive activity loss provisions.
E)  All of the statements are correct.

Question 12

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 13

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.

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 14

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.

Accepted Answer

A)  If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant.
B)  If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant.
C)  If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant.
D)  If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant.
E)  None of the above.

Question 15

Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year.His current loss from the activity is $80,000.Vic had no passive activity income during the year.At the end of the current year:

Accepted Answer

A)  Vic has an at-risk amount in the activity of $120,000 and a suspended passive activity loss of $80,000.
B)  Vic has an at-risk amount in the activity of $200,000 and a suspended passive activity loss of $80,000.
C)  Vic has an at-risk amount in the activity of $120,000 and no suspended passive activity loss.
D)  Vic has an at-risk amount in the activity of $200,000 and no suspended passive activity loss.
E)  None of the above.

Question 16

White Corporation,a closely held personal service corporation,has $150,000 of passive activity losses,$120,000 of active business income,and $30,000 of portfolio income.How much of the passive activity loss can White Corporation deduct?

Accepted Answer

A)  $0
B)  $30,000
C)  $120,000
D)  $150,000
E)  None of the above

Question 17

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.
-Treatment of an installment sale of a passive activity.

Accepted Answer

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

Question 18

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?

Accepted Answer

The answer of Ken has a $40,000 loss from an...

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

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

Exam 11: Investor Losses

In 2017,Emily invests $120,000 in a limited partnership that is not a passive activity.During 2017,her share of the partnership loss is $90,000.In 2018,her share of the partnership loss is $50,000.How much can Emily deduct in 2017 and 2018?

Eric makes an installment sale of a passive activity having suspended losses of $40,000.He collects 25% of the sales price in the current year,and will collect 25% in each of the next three years.Eric can deduct $10,000 of the passive activity loss this year.

Gray Company,a closely held C corporation,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 Gray is not a personal service corporation,it may deduct $34,000 of the passive activity loss.

In the current year,Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner.If she is an active participant and if her modified AGI is $100,000,she can deduct $25,000 of the loss.

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

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.

Ahmad owns four activities.He participated for 120 hours in Activity A,150 hours in Activity B,140 hours in Activity C,and 100 hours in Activity D.Which of the following statements is correct?

In 2017,Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant.The partnership incurs a loss with $100,000 being Arnold's share.Which of the following statements is incorrect?

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.

Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year.His current loss from the activity is $80,000.Vic had no passive activity income during the year.At the end of the current year:

White Corporation,a closely held personal service corporation,has $150,000 of passive activity losses,$120,000 of active business income,and $30,000 of portfolio income.How much of the passive activity loss can White Corporation deduct?

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?

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.

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.