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Exam 6: Losses and Loss Limitations

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Question 1

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Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Gray is not a personal service corporation, it may deduct $34,000 of the passive activity loss.

A) True
B) False

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Question 2

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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?

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.

F) B) and D)
G) None of the above

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Question 3

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Al, who is single, has a gain of $40,000 on the sale of § 1244 stock small business stock) and a loss of $80,000 on the sale of § 1244 stock.As a result, Al has a $40,000 ordinary loss.

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.

A net operating loss occurring in 2018 can only be carried forward and can offset no more than 80% of taxable income in a subsequent year.

Aram 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.

Kathy, who qualifies as 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.

A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year.Identify factors that should be considered in deciding in which year to take the loss.

Nonbusiness income for net operating loss purposes includes dividends received.

In the current year, Juan's home was burglarized.Juan had the following items stolen: ∙ Securities worth $25,000.Juan purchased the securities four years ago for $20,000. ∙ New tools which Juan had purchased two weeks earlier for $8,000.Juan uses the tools in making repairs at an apartment house that he owns and manages. ∙ An antique worth $15,000.Juan inherited the antique a family keepsake) when the property was worth $11,000. Juan's homeowner's policy had a $50,000 deductible clause for thefts.If Juan's salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft.

The excess business loss rule applies to partnerships and S corporations rather than partners and shareholders).

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 activity loss rules?

Hugh has four passive activities which generate the following income and losses in the current year. How much of the $80,000 net passive activity loss can Hugh deduct this year? Calculate the suspended losses by activity).

In 2018, 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 2018 and $180,000 in 2019.Joanne's share of the LLC's losses was $68,000 in 2018 and $36,000 in 2019.How much of these losses can Joanne deduct?

Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity.Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000.How is her loss characterized?

In 2018, Cindy is married and files a joint return.She operates a sole proprietorship in which she materially participates.Her proprietorship generates gross income of $225,000 and deductions of $525,000, resulting in a loss of $300,000.What is Cindy's excess business loss for the year?

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

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?

A bona fide debt cannot arise on a loan between father and son.

Ned, a college professor, owns a separate business not real estate) in which he participates in the current year.He has one employee who works part-time in the business.