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Exam 6: Losses and Loss Limitations

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Question 81

True/False

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Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year.Her modified AGI is $125,000 from an active business.Disregarding any at-risk amount limitation, she may deduct $25,000 of the loss, and the remaining $25,000 is a suspended passive activity loss.

A) True
B) False

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Question 82

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Match the term with the correct response.More than one response may be correct. -Material participation.

A) Taxpayer devotes time aggregating more than 500 hours in all significant participation activities during the year.
B) Participates in making management decisions in a significant and bonafide sense.
C) One in which the individual's participation equals more than 100 hours during the year.
D) Taxpayer devotes time in the activity which constitutes substantially all of the participation in the activity of all individuals.
E) Both options a.and d.are correct.
F) No correct choice is given.

G) A) and B)
H) D) and E)

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Question 83

Multiple Choice

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Melinda earns wages of $80,000, income from a limited partnership of $10,000, and a $30,000 passive activity loss from a real estate rental activity in which she actively participates.Her modified adjusted gross income is $80,000.Of the $30,000 loss, Melinda may deduct:

Losses on rental property are classified as deductions for AGI.

"Other casualty" means casualties similar to those associated with fires, storms, or shipwrecks.

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.

Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.

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.

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

In 2018, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: The personal casualties occurred in a Federally-declared disaster area.Determine the amount of Morley's itemized deduction from the losses.

Five years ago, Tom loaned his son John $20,000 to start a business.A note was executed with an interest rate of 8%, which is the Federal rate.The note required monthly payments of the interest with the $20,000 due at the end of ten years.John always made the interest payments until last year.During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800.Tom is an accrual basis taxpayer whose only income is salary and interest income.The proper treatment for the nonpayment of the note is:

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.

Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective, Linda will be better off if Activity A is not passive.

A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.

Match the treatment for the following types of transactions. -Treatment of a sale of a passive activity where all of the realized gain or loss is recognized currently.

If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than it's adjusted basis, a gain is recognized.

When a taxpayer disposes of a passive activity by gift, what happens to any unused passive activity losses?

Match the treatment for the following types of transactions. -Treatment of suspended credits when passive activity is sold at a loss.

If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year.

Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk.If the business incurs a loss of $80,000 from operations, Stuart will be allowed the full amount as a deduction.