Question 1

Joyce, an architect, earns $100,000 from her practice in the current year.In addition, she receives $35,000 in dividends, capital gains, and annuity income during the year.Further, she incurs a loss of $35,000 from an investment in a passive activity.Joyce's AGI for the year after considering the passive investment is $100,000.

Accepted Answer

The answer of Joyce, an architect, earns $100,000 from her...

Question 2

Kathy, who is a real estate professional, owns an apartment building and devotes 550 hours to managing the activity. All losses from the rental activity will be considered nonpassive and deductible against active income.

Accepted Answer

The answer of Kathy, who is a real estate professional,...

Question 3

Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year.In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago.Consider the following two statements: 
(1) Green's current deduction for passive activity losses is $50,000 if it is a closely held C
Corporation that is not a personal service corporation.
(2) Green's current deduction for passive activity losses is $0 if it is a personal service corporation.Which of the following answers is correct?

Accepted Answer

Closely held C Corporations that are not personal service corporations can use passive activity losses to offset active income, up to the amount of their active income, which in this case is $50,000. Personal service corporations, however, are not allowed to use passive activity losses to offset any type of income, resulting in a $0 current deduction for passive activity losses.

Question 4

Last year, Ted invested $100,000 for a 50% interest in a partnership in which he was a material participant.The partnership incurred a loss, and Ted's share was $150,000.Which of the following statements is incorrect?

Accepted Answer

All the statements provided are correct within the context of partnership taxation and at-risk rules. Ted's nondeductible loss due to the at-risk limitation can indeed be carried forward for future use, his ability to deduct carried over losses is contingent upon his at-risk amount in the partnership, and he is limited to deducting losses up to the amount he has at risk.

Question 5

In 2019, Joanne invested $90,000 for a 20% interest in a limited liability company (LLC) in which she is a material participant.The LLC reported losses of $340,000 in 2019 and $180,000 in 2020.Joanne's share of the LLC's losses was $68,000 in 2019 and $36,000 in 2020.How much of these losses can Joanne deduct?

Accepted Answer

Joanne can deduct up to her basis in the LLC. Her initial basis was $90,000. After deducting $68,000 in 2019, her basis is reduced to $22,000, which is the maximum she can deduct in 2020.

Question 6

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

When Jennifer gives her interest in a passive activity to Harrison, the suspended passive activity loss of $8,000 is transferred to Harrison and can be used to offset any passive activity income Harrison may have in the future, providing a benefit to him. However, Jennifer cannot deduct the loss upon making the gift as it is still a suspended loss.

Question 7

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 closely held personal service corporation can only offset passive activity losses against passive activity income. Since White Corporation has no passive activity income, it cannot deduct any of the passive activity losses.

Question 8

Nell sells a passive activity with an adjusted basis of $45,000 for $105,000.Suspended losses attributable to this property total $45,000.The total gain and the taxable gain are:

Accepted Answer

The total gain is the sales price of $105,000 minus the adjusted basis of $45,000, which equals $60,000. However, only $15,000 of the gain is taxable because the remaining $45,000 is used to offset the suspended losses.

Question 9

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

The investment interest expense that Jared may deduct is limited to the amount of investment income earned during the year, which is $22,000. Therefore, he may deduct $14,000 of investment interest expense in the current year. The other investment expenses of $7,000 do not affect this calculation.

Question 10

In 2019, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity.The partnership reported losses of $200,000 in 2019 and $100,000 in 2020, Kipp's share being $60,000 in 2019 and $30,000 in 2020.How much of the losses from the partnership can Kipp deduct assuming he owns no other investments and does not participate in the partnership's operations?

Accepted Answer

The answer of In 2019, Kipp invested $65,000 for a...

Question 11

Anita owns Activity A, which produces active income, and Activity B, which produces losses.From a tax planning perspective, Anita will be better off if Activity B is a passive activity.

Accepted Answer

The answer of Anita owns Activity A, which produces active...

Question 12

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

If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income. This is because the two departments are part of the same business and can be treated as a single activity for tax purposes. Charles can use his hours worked to meet the material participation test and claim the loss as a deduction against the income from Department A.

Question 13

Matt has three passive activities and has at-risk amounts in excess of $100,000 for each.During the year, the activities produced the following income (losses). $\begin{array}{ll}
\text { Activity A } && (\$ 60,000) \
\text { Activity B } && (40,000) \
\text { Activity C } & &75,000 \
\text { Net passive activity loss } &\underline{\quad\quad}& (\$ 25,000)
\end{array}$ Matt's suspended losses are as follows:

Accepted Answer

The net passive activity loss of $25,000 is allocated proportionally to the losses of Activities A and B. Activity A's loss is $60,000 and Activity B's loss is $40,000, so the allocation is $15,000 to A and $10,000 to B.

Question 14

In the current year, Louise invests $50,000 for a 20% interest in a passive activity.Her share of the loss this year is
$10,000.If this is her only passive activity, the $10,000 loss from the activity this year is suspended for use in a future year.

Accepted Answer

According to the IRS passive activity loss rules, if an individual has a passive activity in which they do not actively participate and they incur a loss, that loss is considered a suspended loss and cannot be used to offset income in the current year. Instead, the loss can be carried forward and used to offset income in future years from the same passive activity or be used to offset any gains from the sale of the passive activity. Therefore, Louise's $10,000 loss from the passive activity this year would be suspended for use in a future year.

Question 15

Gloria owns and works full-time at a shop that rents watercraft of various types to tourists who are vacationing at the beach.If she generates a loss from that activity, the loss is subject to the passive activity loss rules because it is rental property.

Accepted Answer

The loss from the activity is not subject to the passive activity loss rules because Gloria materially participates in the business, making it a non-passive activity despite it involving rental property.

Question 16

Carl, a physician, earns $200,000 from his medical practice in the current year.He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity.In addition, he incurs a loss of $50,000 from an investment in a passive activity.What is Carl's AGI for the current year after considering the passive investment?

Accepted Answer

Carl's AGI is calculated by adding his medical practice income ($200,000) and dividends and interest ($45,000), totaling $245,000. Passive activity losses cannot offset non-passive income, so the $50,000 passive loss does not reduce his AGI.

Question 17

This year Seth had investment royalty income of $31,000, investment expenses of $28,000, and a long-term capital gain of $8,000 on an investment.In calculating his net investment income for the current year, Seth may deduct a maximum of $11,000 of investment interest.

Accepted Answer

Net investment income is calculated by subtracting investment expenses from investment income. Seth's net investment income is $31,000 (royalty income) + $8,000 (capital gain) - $28,000 (expenses) = $11,000. Therefore, he can deduct up to $11,000 of investment interest.

Question 18

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

The suspended loss is the excess of the passive activity losses over the passive activity income. Therefore, for Josh, the suspended loss for the year is ($50,000 - $30,000) = $20,000. Choice C is the correct answer.

Question 19

Tara owns a shoe store and a bookstore.Both businesses are operated in a mall.She also owns a restaurant across the street and a jewelry store several blocks away.

Accepted Answer

Tara can elect to treat all four businesses as a single activity if they are part of an appropriate economic unit for measuring gain or loss, as per IRS regulations on grouping activities.

Question 20

In 2019, 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

As Wang is a material participant, his share of the partnership loss is not subject to the passive activity loss provisions. However, since he only invested $80,000, he can only deduct up to that amount against his other income, making statement A correct. Statement B is correct as well, as nondeductible losses can be carried over and used in future years subject to the at-risk provisions. Statement C is incorrect, because Wang can only use the carried-over loss to the extent of his at-risk amount, which may be less than the $20,000 carried over. Statement E is incorrect, as statement D is incorrect. Hence, the correct answer is D.

Quiz 11: Investor Losses