Fundamentals of Taxation

Business

Quiz 13 :

At-Riskpassive Activity Loss Rules and the Individual Alternative Minimum Tax

Quiz 13 :

At-Riskpassive Activity Loss Rules and the Individual Alternative Minimum Tax

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Discuss the at-risk concept and how it applies to the deductibility of investment losses.
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Alternative minimum tax and Passive income/loss At-risk amount
AMT is applicable to individual corporation. It is a separate tax system which eliminates the tax escape. Passive activities are those where a taxpayer is not materially involved in the business activity. Income or losses from passive activities are not considered for AGI. At-risk amount is the amount invested or borrowed without any recourse.Discussion and analysis
Any amount which contributed by taxpayer's for business activity is borrowed on full recourse, this amount will be considered at-risk amount. To limit the deductible losses from taxpayer's income at-risk passive activity losses, where material participant of taxpayer's is not there those business activity losses is not considered.

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How do the passive loss rules and the at-risk rules work in conjunction to limit losses?
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Alternative minimum tax and Passive income/loss At-risk amount
AMT is applicable to individual corporation. It is a separate tax system which eliminates the tax escape. Passive activities are those where a taxpayer is not materially involved in the business activity. Income or losses from passive activities are not considered for AGI. At-risk amount is the amount invested or borrowed without any recourse.Discussion and analysis
The activities which are not the taxpayer's income from primary sources, passive loss rule was in place to eliminate those tax losses created by it. The supplement of at-risk rules is PAL rule. To finally deduct losses form tax return, Firstly, loss should be allowed for deduction under at- risk and after that it should pass from passive activity loss.

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What are the differences between material participation, active participation, and significant participation?
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Introduction to Passive activity :
It is defined as the one in which the taxpayer is not completely involved.In other words, passive income are the ones in which individual is not occupied on a day to day basis.
Material Participation:
An individual has said to be materially participated in business or trade if he was completely involved in the business on a day-to- day basis and takes substantial decisions of the business.
It determines whether an activity is passive or active.Significant Participation
A taxpayer has said to be significantly participated if taxpayer's involvement is more than 100 Hours in all significant activities of the business.
Active Participation:
It considers regular occupancy to real estate properties.
This rule is less strict than material participation.

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Are the depreciation lives the same for AMT purposes as for regular tax purposes? If not, how are the lives determined for AMT?
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Are medical expenses treated differently for AMT purposes than for regular tax purposes? If so, explain.
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When must Form 6198 and Form 8582 be filed? Does the taxpayer file more than one Form 6198 or Form 8582?
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Kia Lopez (SSN 121-12-1212) resides at 101 Poker Street, Apt. 12A, Hickory, FL 12345. Her W-2 shows the following: img In 2009, Kia contributed cash of $7,000 to Apartment Rentals Limited Partnership (ARLP) in return for a 13% limited partnership interest. She is an active participant. Kia's share of ARLP income and losses for the year per her K-1 were as follows: img ARLP had no liabilities. Kia does not itemize and has no other investments or passive activities. Prepare Form 1040 for Kia Lopez for 2009. You will need Form 1040, Schedule E (page 2), Form 6198, and Form 8582.
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Discuss the concept of material participation. To be considered a material participant, what tests must the taxpayer satisfy?
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Which of the following increase(s) a taxpayer's at-risk amount? a. Cash and the adjusted basis of property contributed to the activity. B) Borrowed amounts used in the activity for which the taxpayer is personally liable. C) Income from the activity. D) All of the above.
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When a passive activity is sold or otherwise disposed of, what happens to any suspended losses from that activity?
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What are the differences between recourse, nonrecourse, and qualified nonrecourse liabilities? Which liabilities are considered at-risk?
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What amounts are considered at-risk when making the determination of a deductible loss?
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Discuss the AMT formula and how it relates to the regular income tax. Include in your discussion factors that cause AMT to be assessed.
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When a loss is disallowed under the passive activity loss rules, what happens to that loss in future years?
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Kurt and Ashley Tallo (SSNs 121-21-2121 and 430-34-4343) reside at 1901 Princess Ave., Park City, UT 12345. Ashley does not work outside the home. Kurt's W-2 shows the following: img The Tallos also have the following: img Kurt and Ashley have four passive activities. They received K-1s from four partnerships with the following income or loss on line1. They are at-risk in each activity, so the passive loss rules are the only obstacle. img Prepare Form 1040 for the Tallos for 2009. You will need Form 1040, Schedule A, Schedule E (page2), Form 6251, and Form 8582. Do not compute the underpayment penalty, if any.
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Discuss the tax basis calculation adjustment. Why is the gain or loss on the sale of depreciable assets different for AMT purposes than for regular tax purposes?
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What is a passive activity ? What types of activities are automatically considered passive?
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Discuss the rules concerning the $25,000 loss offset for rental activities. Why are losses of $25,000 allowed for some taxpayers?
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What AMT adjustment items are likely to affect all taxpayers who itemize their deductions? Give examples.
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Nathan is married with two children and has AGI of $405,000. He also has the following AMT adjustments and preferences: a. Itemized deductions: img b. Depreciation of a rental property purchased in August of 2001 for $210,000. c. Depreciation on personal property: img d. Incentive Stock Option - Nathan exercises options to purchase 1000 shares at $19 per share when the market value is $26. Prepare Form 6251 for the calculation of AMT. ( Hint : The regular tax is $84,900.)
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