Quiz 13: At-Riskpassive Activity Loss Rules and the Individual Alternative Minimum Tax

An equipment leasing activity is not subject to the at-risk rules.

The initial amount considered at-risk is the cash plus the adjusted basis of property contributed to the activity plus certain borrowed amounts.

The Tara Partnership (not involved in real estate)generated income of $75,000 during the year.Since the partnership is involved in an activity that is subject to the at-risk rules,all of Tara's partners must file Form 6198 with their individual income tax returns.

A taxpayer's share of nonrecourse debt is considered an amount at-risk.

Most real estate debt meets the requirements of qualified nonrecourse financing.

The term "passive activity" includes any activity for the production of income in which the taxpayer does not materially participate.

If a limited partner materially participates in the trade or business of a limited partnership,the passive loss rules still apply.

To be considered a material participant in an activity,a taxpayer must meet all of the seven tests prescribed in the regulations.

Clio's hot dog stand is only open during lunch on weekdays.In total,Clio,who is the sole owner and operator,worked 450 hours at the hot dog stand during the year.Clio is not considered a material participant with respect to the hot dog stand business.

The general rule concerning passive losses is that passive activity losses can only be deducted to the extent of passive and portfolio income.

Two equal partners involved in a passive activity with identical passive losses from that activity may be allowed to deduct different amounts of the losses on their own tax returns.

The passive activity loss rules require income/loss items to be separated into two categories: active income/loss and passive income/loss.

Jon is in the car rental business.Most of his customers rent cars on a daily basis.Jon's car rental business is considered a passive activity since rental activities are always treated as passive activities.

Libby owns and operates Mountain View Inn,a bed and breakfast.Libby's inn is not considered a passive activity.

"Active participation" is a much more difficult standard to meet than "material participation."

A loss must first be allowed under the passive activity loss rules and then must pass through the at-risk rules in order to ultimately be deducted on the tax return.

If a taxpayer disposes of a passive activity in a taxable transaction,suspended passive losses from past years can be used to offset salary and portfolio income.

The AMT tax rate for individuals is 20%.

Adjustments to AMTI can be either positive or negative.

Tax preference items can be either positive or negative.

The standard deduction is added back as a positive adjustment to AMTI.

Itemized deductions are allowed in their entirety for AMT purposes.

Every taxpayer who calculates depreciation on his or her tax return will have a depreciation adjustment for AMT purposes.

Gifts to charity are not allowed for AMT purposes.

There is no difference between regular tax depreciation and AMT depreciation on real property placed in service after 1998.

Generally,the gains and losses recognized for regular tax purposes are the same amount as the gains and losses recognized for AMT purposes.

The at-risk amount is increased each tax year by: A) Income items. B) The basis of assets contributed. C) The share of debt the investor is liable to repay. D) All of these.

Which of the following decreases a taxpayer's at-risk amount? A) Cash distributions. B) Increases in liabilities. C) Income items. D) Cash contributions.

Which of the following increases the taxpayer's at-risk amount? A) A taxpayer's share of recourse liabilities. B) A taxpayer's share of qualified nonrecourse liabilities. C) A taxpayer's share of nonrecourse liabilities. D) Both A taxpayer's share of recourse liabilities and A taxpayer's share of qualified nonrecourse liabilities.

Paul invests $10,000 cash in an equipment leasing activity for a 15% ownership share in the business.The remaining 85% owner is Amanda.Amanda contributes $10,000 and personally borrows $75,000 that she also invests in the business.What are the at-risk amounts for Paul and Amanda? A) Option a B) Option b C) Option c D) Option d

Stuart owns a 20% interest in a partnership (not involved in real estate)in which his at-risk amount was $18,000 at the beginning of the year.The partnership produces a $50,000 loss for the year.What is Stuart's at-risk amount at the end of the year? A) $0. B) $8,000. C) $10,000. D) ($32,000).

What form must a taxpayer file if he or she is at-risk in an activity? A) Form 6198. B) Form 4797. C) Form 8582. D) Form 1040,Schedule D.

Bailey owns a 20% interest in a partnership (not involved in real estate)in which his at-risk amount was $25,000 at the beginning of the year.During the year,Bailey receives a distribution of $20,000 from the partnership.The partnership produces an $80,000 loss during the year.If you ignore the passive loss rules,Bailey's deductible loss for the year is: A) $5,000. B) $20,000. C) $25,000. D) $80,000.

Claudia invested $50,000 cash in the C&S General Partnership and received a 20% interest.The partnership borrowed $200,000 of full recourse debt from a local bank.Assuming that Claudia is personally liable for $40,000 if the partnership defaults on the loan,what is Claudia's at-risk amount before considering any partnership income or loss? A) $0. B) $40,000. C) $50,000. D) $90,000.

Baxter invested $50,000 in an activity in 2010.At the beginning of 2012,Baxter's at-risk amount was $10,000.Baxter's share of losses from the activity were as follows: If you ignore the passive loss rules,how much income/loss will Baxter have from the activity in 2014? A) $0. B) $5,000. C) $10,000. D) $15,000.

How much,in rental losses,can an individual earning a salary of $125,000 per year offset against salary if he or she owns at least 10% of a rental activity and actively participates in the rental activity? A) $0. B) $2,500. C) $12,500. D) $25,000.

Which of the following is a passive activity? A) A limited partnership interest. B) Rental real estate activities where the owner is a real estate professional and works 800 hours per year. C) A trade or business in which the taxpayer materially participates. D) All of these.

Rene owns four small businesses.Rene spends the following number of hours this year working in those businesses: Business A,105 hours; Business B,130 hours; Business C,120 hours; Business D,99 hours.Which of the following statements is correct? A) Businesses A,B,and C are material participation activities. B) Businesses A,B,C,and D are all significant participation activities. C) Businesses A,B,and C are significant participation activities. D) Both Businesses A,B,and C are material participation activities and Businesses A,B,and C are significant participation activities are correct.

The term "active participation" is used to determine: A) Whether an activity is considered passive. B) Whether a taxpayer is a material participant. C) Whether a taxpayer is eligible for the $25,000 rental offset. D) None of these.

Alice is an attorney and earned $175,000 from her practice in the current year.Alice also owns three passive activities.The activities had the following income and losses: What is Alice's adjusted gross income for the current year? A) $119,000. B) $159,000. C) $175,000. D) $215,000.

Denise's AGI is $145,000 before considering her single rental property.During the year,Denise had a rental loss of $13,000.What is Denise's AGI after considering the rental loss? A) $122,500. B) $132,000. C) $142,500. D) $145,000.

Spencer has an ownership interest in three passive activities.In the current tax year,the activities had the following income and losses: How much in passive losses can Spencer deduct? A) $0. B) $12,000. C) $16,000. D) $20,000.

When determining whether a limited partnership loss is deductible,a taxpayer must first: A) Apply only the passive activity loss rules. B) Apply only the at-risk rules. C) Apply the passive activity loss rules and then the at-risk rules. D) Apply the at-risk rules and then the passive activity loss rules.

Ferris owns an interest in,but does not materially participate in,an activity.He has $30,000 at-risk.The business produced a loss in the current year and Ferris's share of the loss is $45,000.Assuming Ferris has no passive income,how much of the $45,000 loss will be deductible by Ferris? A) $0. B) $30,000. C) $45,000. D) Cannot be determined.

If a loss is disallowed under passive loss rules,the loss is: A) Lost forever. B) Carried over indefinitely and deductible when passive income is generated. C) Carried over indefinitely and deductible when the activity is disposed of. D) Both Carried over indefinitely and deductible when passive income is generated and Carried over indefinitely and deductible when the activity is disposed of.

Jacob is single with no dependents.During 2014,Jacob has $110,000 of taxable income.He has $38,000 of positive AMT adjustments and $22,000 of tax preferences.Jacob does not itemize his deductions but takes the standard deduction.Calculate Jacob's AMTI. A) $120,150. B) $173,950. C) $176,200. D) $180,150.

Which of the following itemized deductions is not allowed for AMT? A) Miscellaneous deductions. B) Depreciation. C) Medical expenses. D) Charitable contributions.

For AMT purposes,the standard deduction and personal exemptions are: A) Allowed for AMT purposes. B) Added as a positive AMT adjustment. C) Subtracted as a negative AMT adjustment. D) Reduced by half for AMT purposes.

Jonathan is married,files a joint return,and has one child.During 2014,Jonathan has $85,000 of taxable income.He has $20,000 of positive AMT adjustments and $28,000 of tax preferences.Since Jonathan rents his home (pays no mortgage interest)and lives in Tennessee (has no state income tax),he does not itemize his deductions but takes the standard deduction.Calculate Jonathan's AMTI (before exclusion amount). A) $133,500. B) $144,850. C) $145,400. D) $157,250.

AMT depreciation of personal property is calculated using which method? A) Straight-line method. B) 150% declining balance method. C) 200% declining balance method. D) Sum-of-the-years digits method.

Cal reported the following itemized deductions on his 2014 tax return.His AGI for 2014 was $85,000.The mortgage interest is all qualified mortgage interest to purchase his personal residence.For AMT,compute his total itemized deductions. A) $0. B) $17,700. C) $25,700. D) $33,600.

After computing all tax preferences and AMT adjustments,Adam and his wife Cindy have AMTI of $290,000.If Adam and Cindy file a joint tax return,what exemption amount can they claim for AMT for 2014? A) $0. B) $48,725. C) $52,800. D) $82,100.

Heather purchased furniture and fixtures (7-year property)for her retail shop for $50,000.What is the AMT depreciation adjustment required in 2014 if the property was purchased in May 2014,assuming no bonus depreciation was taken? A) $0. B) $1,790. C) $5,355. D) $7,145.

Catherine purchased furniture and fixtures (7-year property)for her shop for $80,000 in May 2014.What AMT depreciation adjustment is required in 2014? A) $0. B) $2,864. C) $8,568. D) $11,432.

Joshua purchased business furniture and fixtures (7-year property)for $40,000 in May 2011.On July 15,2014,Joshua sold the furniture and fixtures for $30,000.During his years of ownership,he had taken $27,504 of depreciation for regular tax purposes.AMT depreciation for that period was $17,276.What is the 2014 AMT adjustment required as a result of the sale of the assets? A) $0. B) $7,276. C) $10,228. D) $17,504.

After computing all tax preferences and AMT adjustments,Peter has AMTI of $210,000 in 2014.If Peter is single,what exemption amount can he claim for AMT in 2014? A) $0. B) $29,625. C) $52,800. D) $82,100.

Beverly works for a large publicly traded company and regularly receives incentive stock options as bonuses.In 2014,Beverly exercises options to purchase 1,000 shares at $48 per share when the market value is $72 per share.What is Beverly's AMT adjustment from the exercise of the options? A) $24,000. B) $48,000. C) $72,000. D) None of these.

For AMT purposes,a taxpayer must use which method to report proceeds from long-term contracts? A) The completed contract method. B) The percentage-of-completion method. C) The installment method. D) None of these.

Tax preference items for AMT: A) Can be positive or negative. B) Can only result in a positive addition to AMTI. C) Do not affect the AMT calculation. D) None of these.

In 2012,Mary invested $200,000 in a business that is not a passive activity.During 2013,her share of the business loss is $140,000.In 2014,her share of the business loss is $100,000.How much can Mary deduct in 2013 and 2014?

Identify factors that increase or decrease the at-risk amount.

In 2014,Ethan contributes cash of $50,000 and property with a fair market value of $100,000 and basis of $20,000 in exchange for a 20% interest in the EFP Partnership.The partnership is not a passive activity.For 2014,his share of partnership items were an ordinary loss of $80,000,interest income of $2,000,dividends of $5,000,and capital gains of $4,000.How much of the current year loss is deductible by Ethan and what is Ethan's at-risk amount on December 31,2014?

In 2014,Nigel contributes cash of $10,000 in exchange for a 20% interest in the NDP Partnership.The partnership is not a passive activity.For 2014,the partnership had an ordinary loss of $80,000,interest income of $2,000,dividends of $5,000,and capital gains of $4,000.How much of the current year loss is deductible by Nigel and what is Nigel's at-risk amount on December 31,2014?

Terence and Alfred each invested $10,000 cash in T&A General Partnership and each received a 50% interest in the partnership.The partnership borrowed $100,000 in full recourse debt. a.Assume that the $100,000 was borrowed from a bank.What are the amounts Terence and Alfred have at-risk with respect to their partnership interests? b.Assume that the $100,000 was borrowed from Alfred.What are the amounts Terence and Alfred have at-risk with respect to their partnership interests?

In 2010,Lindsay's at-risk amount was $50,000 at the beginning of the year.Lindsay's shares of income and losses from the activity were as follows (ignore passive loss rules): In 2014,what amount of income or loss will Lindsay report from this activity?

Cory sells his entire interest in a rental property in which he actively participated at a gain of $12,000.The activity has a current year loss of $4,800 and $16,000 in prior year suspended losses.During the year,Cory has $80,000 in salary.What is Cory's AGI for the year?

Baird has four passive activities.The following income and losses are generated in the current year. How much of the $60,000 net passive loss can Baird deduct this year? Calculate the suspended losses (by activity).

Elijah owns an apartment complex that he actively manages.Elijah paid $300,000 cash for the apartment complex three years ago.During 2014,the rental activity generated a loss of $30,000.How much of the loss can Elijah deduct in 2014 in both of the following independent cases? a.Elijah has $80,000 of AGI (salary)before considering the loss generated by the apartment building. b.Elijah has $120,000 of AGI (salary)before considering the loss generated by the apartment building.

Oliver has an $80,000 loss from an investment in a partnership in which he does not materially participate.He paid $60,000 for his interest.Oliver also has $10,000 of passive income from another limited partnership.How much of the loss,if any,is disallowed by the at-risk rules? How much is disallowed by the passive loss rules?

Sarah is single with no dependents.During 2014,Sarah has $86,000 of taxable income.She has $14,000 of positive AMT adjustments and $24,000 of tax preferences.Sarah does not itemize her deductions but takes the standard deduction.Calculate Sarah's AMTI.

Antonio reported the following itemized deductions on his 2014 tax return.His AGI for 2014 was $95,000.The mortgage interest is all qualified mortgage interest to purchase his personal residence.For AMT,compute his total adjustment for itemized deductions.

Jordan purchased a warehouse for $600,000.$100,000 of the cost was properly allocated to the land. a.If the property was purchased in April of 1998,what is the AMT depreciation adjustment required in 2014? b.If the property was purchased in April of 2014,what is the AMT depreciation adjustment required in 2014?