Question 1

Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business? income from a passive activity? and income from a real estate activity in which the taxpayer actively participates.

Accepted Answer

A) True 
 B)False

Question 2

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 ?????? ?????. 
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 3

Melinda earns wages of $80,000, income from a limited partnership of $10,000, and a $30,000 passive activity loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80,000. Of the $30,000 loss, Melinda may deduct:

Accepted Answer

A)  $0. 
B)  $10,000. 
C)  $25,000. 
D)  $30,000. 
E)  Some other amount.

Question 4

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

Accepted Answer

A) True 
 B)False

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

Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations. Jack's at-risk amount at the end of the year is $44,000.

Accepted Answer

A) True 
 B)False

Question 7

Match the treatment for the following types of transactions.
a. The losses are allowed in the years in which gain is recognized.
b. Suspended losses are allowed to offset the income from the activity, other passive activities, or active income. 
c. Suspended losses are allowed to the taxpayer to the extent they exceed the amount, if any, of the step-up in basis allowed.
d. Any suspended losses may be used in the current year.
e. The suspended losses are added to the basis of the property.
f. No correct choice is given.
-Treatment of a sale of a passive activity where all of the realized gain or loss is recognized currently.

Accepted Answer

The answer of Match the treatment for the following types...

Question 8

Last year, Wanda gave her daughter a passive activity (adjusted basis of $80,000? fair market value of $160,000) with suspended losses of $20,000. In the current year, her daughter realizes income of $10,000 from the activity. What are the tax effects to Wanda and her daughter?

Accepted Answer

The answer of Last year, Wanda gave her daughter a...

Question 9

Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.

Accepted Answer

A)  If Charles elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income. 
B)  Charles may not treat Department A and Department B as separate activities because they are parts of one business. 
C)  If Charles elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income. 
D)  If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income. 
E)  None of the above.

Question 10

Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.

Accepted Answer

A) True 
 B)False

Question 11

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive activity loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.

Accepted Answer

A) True 
 B)False

Question 12

Josh has investments in two passive activities. Activity A (acquired three years ago) produces income of $30,000 this year, while Activity B (acquired two years ago) produces a loss of $50,000. What is the amount of Josh's suspended loss for the year?

Accepted Answer

A)  $0 
B)  $18,000 
C)  $20,000 
D)  $50,000 
E)  None of the above

Question 13

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 14

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.
-At-risk amount.

Accepted Answer

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

Question 15

Wolf Corporation has active income of $55,000 and a passive activity loss of $33,000 in the current year. Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

Accepted Answer

A) True 
 B)False

Question 16

Jennifer gave her interest in a passive activity (fair market value of $75,000 and basis of $60,000) to Harrison.
Associated with the interest is a suspended passive activity loss of $8,000. Upon making the gift, the suspended passive activity loss is not deductible to Jennifer, but it will benefit Harrison.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following decreases a taxpayer's at-risk amount?

Accepted Answer

A)  Cash and the adjusted basis of property contributed to the activity. 
B)  Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity. 
C)  Taxpayer's share of amounts borrowed for use in the activity that is qualified nonrecourse financing. 
D)  Taxpayer's share of the activity's income. 
E)  None of the above.

Question 18

Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year. He incurred other investment expenses of $7,000 during the year. Jared may deduct $14,000 of investment interest in the current year.

Accepted Answer

A) True 
 B)False

Question 19

In 2018, Wang 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 Wang's share. Which of the following statements is incorrect?

Accepted Answer

A)  Since Wang has only $80,000 of capital at risk, he cannot deduct any more than this amount against his other income. 
B)  Wang's nondeductible loss of $20,000 can be carried over and used in future years (subject to the at-risk provisions). 
C)  If Wang has taxable income of $40,000 from the partnership in 2019 and there are no other transactions that affect his at-risk amount, he can use all of the $20,000 loss carried over from 2018. 
D)  Wang's $100,000 loss is nondeductible in 2018 and 2019 under the passive activity loss provisions. 
E)  All of the statements are correct.

Question 20

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:
  
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...

Exam 11: Investor Losses

Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business? income from a passive activity? and income from a real estate activity in which the taxpayer actively participates.

Melinda earns wages of $80,000, income from a limited partnership of $10,000, and a $30,000 passive activity loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80,000. Of the $30,000 loss, Melinda may deduct:

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

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?

Last year, Wanda gave her daughter a passive activity (adjusted basis of $80,000? fair market value of $160,000) with suspended losses of $20,000. In the current year, her daughter realizes income of $10,000 from the activity. What are the tax effects to Wanda and her daughter?

Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.

Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive activity loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.

Josh has investments in two passive activities. Activity A (acquired three years ago) produces income of $30,000 this year, while Activity B (acquired two years ago) produces a loss of $50,000. What is the amount of Josh's suspended loss for the year?

Wolf Corporation has active income of $55,000 and a passive activity loss of $33,000 in the current year. Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

Which of the following decreases a taxpayer's at-risk amount?

Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year. He incurred other investment expenses of $7,000 during the year. Jared may deduct $14,000 of investment interest in the current year.

In 2018, Wang 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 Wang's share. Which of the following statements is incorrect?