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Exam 6: Losses and Loss Limitations

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Question 21

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Last year, Amos had AGI of $50,000. Amos also had a diamond ring stolen which cost $20,000 and was worth $17,000 at the time of the theft. He itemized deductions on last year's tax return. In the current year, Amos recovered $17,000 from the insurance company. Therefore, he must include $11,900 in gross income on the tax return for the current year.

A) True
B) False

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Question 22

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

A) True
B) False

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Question 23

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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?

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.

In the current year, Lucile, who has AGI of $70,000 before considering rental activities, is active in three separate real estate rental activities and is in the 28% tax bracket. She had $15,000 of losses from Activity A, $25,000 of losses from Activity B, and income of $20,000 from Activity C. She also had $3,100 of tax credits from Activity A. Calculate her deductions and credits currently allowed and the suspended losses and credits.

Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?

Which of the following events would produce a deductible loss?

Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income.

Dick participates in an activity for 90 hours during the year. He has no employees and there are no other participants. Dick is a material participant.

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?

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 loss rules?

In 2014, Kelly earns a salary of $200,000 and invests $40,000 for a 20% interest in a partnership not subject to the passive loss rules. Through the use of $800,000 of nonrecourse financing, the partnership acquires assets worth $1 million. The activity produces a loss of $150,000, of which Kelly's share is $30,000. In 2015, Kelly's share of the loss from the partnership is $15,000. How much of the loss from the partnership can Kelly deduct?

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.

On September 3, 2015, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2015, the stock was worth $85,000. On August 15, 2016, Able was notified that the stock was worthless. How should Able report this item on his 2016 tax return?

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:

Describe the types of activities and taxpayers that are subject to the at-risk rules.

Judy owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year. The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year. Her at-risk amount at the end of the year is $43,000.

Bruce owns a small apartment building that produces a $25,000 loss during the year. His AGI before considering the rental loss is $85,000. Bruce must be a material participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.

A loss is not allowed for a security that declines in value.

Pat sells a passive activity for $100,000 that has an adjusted basis of $55,000. During the years of her ownership, $60,000 of losses have been incurred that were suspended under the passive activity loss rules. In addition, the passive activity generated tax credits of $10,000 that were not utilized and suspended. Determine the tax treatment to Pat on the disposition of the property.