Question 1

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

Accepted Answer

A) True 
 B)False

Question 2

In the current year, Crow Corporation, a closely held C corporation that is not a personal service corporation, has $100,000 of passive activity losses, $80,000 of active business income, and $20,000 of portfolio income.How much of the passive activity loss may Crow deduct in the current year?

Accepted Answer

A)  $0.
B)  $20,000.
C)  $80,000.
D)  $100,000.
E)  None of these.F) None of the above
G) A) and D)

Question 3

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?

Accepted Answer

A)  Ted's nondeductible loss of $50,000 can be carried over and used in the future (subject to the at-risk provisions) .
B)  If Ted has taxable income of $50,000 from the partnership in the current year and no other transactions that affect his at-risk amount, he can use all of the $50,000 loss carried over.
C)  Since Ted has only $100,000 of capital at risk, he cannot deduct more than $100,000 against his other income.
D)  None of these is incorrect.E) A) and B)
F) All of the above

Question 4

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing.
Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Accepted Answer

A) True 
 B)False

Question 5

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:

Accepted Answer

A)  Vic has an at-risk amount in the activity of $120,000 and a suspended passive activity loss of $80,000.
B)  Vic has an at-risk amount in the activity of $200,000 and a suspended passive activity loss of $80,000.
C)  Vic has an at-risk amount in the activity of $120,000 and no suspended passive activity loss.
D)  Vic has an at-risk amount in the activity of $200,000 and no suspended passive activity loss.
E)  None of these is correct.F) A) and C)
G) All of the above A

Question 6

Rachel acquired a passive activity several years ago.Until 2016, the activity was profitable, and Rachel's at-risk amount at the beginning of 2016 was $300,000.The activity produced losses of $80,000 in 2016, $50,000 in 2017, and $70,000 in 2018.In 2019, the activity produced income of $90,000.How much is Rachel's suspended passive activity loss at the beginning of 2020?

Accepted Answer

A)  $150,000.
B)  $110,000.
C)  $60,000.
D)  $0.
E)  None of these.F) None of the above
G) A) and B) B

Question 7

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:

Accepted Answer

A)  $60,000 total gain; $105,000 taxable gain.
B)  $10,000 total gain; $15,000 taxable gain.
C)  $60,000 total gain; $0 taxable gain.
D)  $60,000 total gain; $15,000 taxable gain.
E)  None of these.F) A) and C)
G) B) and D) D

Question 8

In 2019, 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?

Accepted Answer

A)  Since Wang has only $80,000 of capital at risk, he cannot deduct any more than this amount against his other income.
B)  Wang's nondeductible loss of $20,000 can be carried over and used in future years (subject to the at-risk provisions) .
C)  If Wang has taxable income of $40,000 from the partnership in 2020 and there are no other transactions that affect his at-risk amount, he can use all of the $20,000 loss carried over from 2019.
D)  Wang's $100,000 loss is nondeductible in 2019 and 2020 under the passive activity loss provisions.
E)  All of the statements are correct.F) B) and E)
G) C) and D)

Question 9

Carl, a physician, earns $200,000 from his medical practice in the current year.He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity.In addition, he incurs a loss of $50,000 from an investment in a passive activity.What is Carl's AGI for the current year after considering the passive investment?

Accepted Answer

A)  $195,000
B)  $200,000
C)  $240,000
D)  $245,000
E)  None of theseF) All of the above
G) A) and D)

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A)  If Charles elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income.
B)  Charles may not treat Department A and Department B as separate activities because they are parts of one business.
C)  If Charles elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income.
D)  If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income.
E)  None of these is correct.F) C) and D)
G) C) and E)

Question 12

Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year.He incurred other investment expenses of $7,000 during the year.Jared may deduct $14,000 of investment interest in the current year.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)  Cash and the adjusted basis of property contributed to the activity.
B)  Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity.
C)  Taxpayer's share of amounts borrowed for use in the activity that is qualified nonrecourse financing.
D)  Taxpayer's share of the activity's income.
E)  None of these.F) A) and D)
G) A) and B)

Question 14

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:

Accepted Answer

A)  $0.
B)  $10,000.
C)  $25,000.
D)  $30,000.
E)  Some other amount.F) A) and D)
G) All of the above

Question 15

Ramon incurred $83,100 of interest expense related to his investments this year.His investment income included $34,500 of interest and a $37,500 net capital gain on the sale of securities.Ramon has asked you to compute the amount of his deduction for investment interest, taking into consideration any options he might have.What is the maximum amount of Ramon's investment interest expense deduction in the current year?

Accepted Answer

A)  $19,500.
B)  $34,500.
C)  $72,000.
D)  $83,100.
E)  None of these.F) B) and E)
G) B) and D)

Question 16

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?

Accepted Answer

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 these is correct.F) B) and D)
G) B) and C)

Question 17

Joyce, an architect, earns $100,000 from her practice in the current year.In addition, she receives $35,000 in dividends, capital gains, and annuity income during the year.Further, she incurs a loss of $35,000 from an investment in a passive activity.Joyce's AGI for the year after considering the passive investment is $100,000.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  Taxpayer devotes time aggregating more than 500 hours in all significant participation activities during the year.
B)  Taxpayer participates in making management decisions in a significant and bonafide sense.
C)  It is 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 D)
H) All of the above

Question 20

During the current year, Harry earned investment income of $18,500.In addition, he incurred investment interest expense of $15,500 and other investment expenses of $9,000.Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Accepted Answer

A) True 
 B)False

Exam 11: Investor Losses

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

Correct Answer
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In the current year, Crow Corporation, a closely held C corporation that is not a personal service corporation, has $100,000 of passive activity losses, $80,000 of active business income, and $20,000 of portfolio income.How much of the passive activity loss may Crow deduct in the current year?

Correct Answer
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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?

Correct Answer
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Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Correct Answer
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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:

Correct Answer
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A

Correct Answer
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B

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:

Correct Answer
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D

In 2019, 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?

Correct Answer
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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.

Correct Answer
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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.

Correct Answer
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Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year.He incurred other investment expenses of $7,000 during the year.Jared may deduct $14,000 of investment interest in the current year.

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

Correct Answer
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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:

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

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

Correct Answer
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During the current year, Harry earned investment income of $18,500.In addition, he incurred investment interest expense of $15,500 and other investment expenses of $9,000.Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Correct Answer
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Exam 11: Investor Losses

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

Correct AnswerverifiedShow Answer

In the current year, Crow Corporation, a closely held C corporation that is not a personal service corporation, has $100,000 of passive activity losses, $80,000 of active business income, and $20,000 of portfolio income.How much of the passive activity loss may Crow deduct in the current year?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedA

Correct AnswerverifiedB

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:

Correct AnswerverifiedD

In 2019, 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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year.He incurred other investment expenses of $7,000 during the year.Jared may deduct $14,000 of investment interest in the current year.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

During the current year, Harry earned investment income of $18,500.In addition, he incurred investment interest expense of $15,500 and other investment expenses of $9,000.Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Correct AnswerverifiedShow Answer

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