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Exam 11: Investor Losses

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Question 1

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Art's at-risk amount in a passive activity was $60,000 at the beginning of 2016. His loss from the activity in 2016 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive activity income from the activity in 2017. Under the passive activity loss rules, Art's suspended loss at the end of 2017 is:

A) $15,000.
B) $20,000.
C) $45,000.
D) $60,000.
E) None of the above.

F) A) and B)
G) C) and D)

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Question 2

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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?

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In general, passive activity losses are ...

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Question 3

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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.

Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000. All of the $80,000 passive activity loss can be deducted on Kim's final income tax return.

Describe the general rules that limit the deduction of investment interest expense.

Rick, a computer consultant, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business.

Lindsey, an attorney, earns $125,000 from her law practice in the current year. In addition, she receives $50,000 in dividends and interest during the year. Further, she incurs a loss of $40,000 from an investment in a passive activity. What is Lindsey's AGI for the year after considering the passive investment?

In 2017, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2017 and $100,000 in 2018, Kipp's share being $60,000 in 2017 and $30,000 in 2018. How much of the losses from the partnership can Kipp deduct assuming he owns no other investments and does not participate in the partnership's operations?

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

Identify the types of income that are classified as investment income. Discuss the flexibility that a taxpayer has with respect to certain types of income that may potentially be considered investment income.

In 2017, 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 2017 and $180,000 in 2018. Joanne's share of the LLC's losses was $68,000 in 2017 and $36,000 in 2018. How much of these losses can Joanne 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.

Match the treatment for the following types of transactions. a.The losses are allowed in the years in which gain is recognized. b.Suspended losses are allowed to offset the income from the activity, other passive activities, or active income. c.Suspended losses are allowed to the taxpayer to the extent they exceed the amount, if any, of the step-up in basis allowed. d.Any suspended losses may be used in the current year. e.The suspended losses are added to the basis of the property. f.No correct choice is given. -Treatment of an installment sale of a passive activity.

Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year. In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago. Consider the following two statements: ​ Which of the following answers is correct?

David earned investment income of $20,000, incurred investment interest expense of $12,000, and other investment expenses of $9,000 during the current year. David can deduct $12,000 of investment interest for this year.

Josh has investments in two passive activities. Activity A (acquired three years ago) produces income of $30,000 this year, while Activity B (acquired two years ago) produces a loss of $50,000. What is the amount of Josh's suspended loss for the year?

Identify from the list below the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition.

Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to this property total $45,000. The total gain and the taxable gain are:

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.

Oriole Corporation has active income of $45,000 and a passive activity loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.