M4 Loss Limitations for Individuals

Question 1

4 Categories of Income

Answer 1

1) Ordinary (salaries, state and local tax refunds, IRA, pension, self-employment, alimony, social security, etc.)
2) Portfolio (interest and dividends)
3) Passive (rental income, beneficiaries, partnership, LLC, S-Corps)
4) Capital

Question 2

Loss Limitations. 3 Factors?

Answer 2

1) Tax Basis
2) At-risk Basis
3) Passive loss limitations

Question 3

Tax Basis is essentially the taxpayer’s ___ in the asset adjusted for __ and __. What happens to the losses not deductible in the current year?

Answer 3

Investment adjusted for items such as income and debt

Losses carried forward until taxpayer generates more tax basis to absorb the loss

Question 4

At-Risk basis is the taxpayer’s ______.

Losses that have tax basis but not at-risk basis are?

Answer 4

Economic risk in the activity

Carried forward until taxpayer generates more at-risk basis OR until activity is SOLD

Question 5

Passive Activity Losses (PALs) is any activity taxpayer does NOT ____ such as …

Answer 5

does not materially participate such as rental activities, interest in limited partnerships, S corps, etc.

Question 6

PALs.

Deductibility - expenses related to these activities can be deducted up to ___
Allocate how?

Answer 6

Up to extent of passive income

Allocate to any passive income on a PRO RATA basis

Question 7

PALs. What happens to these passive losses if can’t be used?

Answer 7

Carry forward indefinitely
Offset passive income in future years
Fully tax deductible in year SOLD
If TP becomes material participant, the used passive losses are released for the same activity

Question 8

PALs - 2 Exceptions to the passive losses rule

Answer 8

1) Mom and Pop Exception:
- can deduct up to 25,000 per year and active participant (own at least 10% of the activity)
- Excess carried forward indefinitely
- $25,000 up to AGI of 100,000. Reduced $0.50 by every dollar over the 25,000 up to AGI of 150,000

2) Real estate professional
- >50% of personal services are real estate
- perform more than 750 hours of RE services

Question 9

Net Capital Loss maximum deduction amount

Answer 9

$3,000

Question 10

What happens to the capital losses in excess of 3,000?

Answer 10

Carried forward indefinitely