MCQ Subunit 8 Sept 2023 Flashcards
In the current year, Kathy purchased a small apartment building for $200,000. She used $25,000 of her own money and $25,000 that she borrowed from her father to make the down payment. She signed a note to pay the remainder of the purchase price to the seller. Both the loan from her father and the debt to the seller were nonrecourse, secured only by the apartment building. The terms of both debts were commercially reasonable and on substantially the same terms as loans involving unrelated persons. Kathy’s at-risk limitation on losses is
A. $175,000
B. $25,000
C. $50,000
D. $200,000
C. $50,000
Kathy’s at-risk amount is $50,000 ($25,000 Kathy’s own money + $25,000 father’s amount). The debt to the seller is not included because the seller is a person from whom the taxpayer acquired the property and is not a qualified person.
All of the following individuals, who meet the income and residency requirements, qualify for the Earned Income Credit in 2023 except
A. A 22-year-old married individual whose spouse is 18 years old.
B. A 19-year-old head of household with a qualifying child.
C. A 45-year-old single individual.
D. A 60-year-old married individual.
A. A 22-year-old married individual whose spouse is 18 years old.
A taxpayer can be eligible for the Earned Income Credit by having a qualifying child or meeting three qualifications:
- The individual must have his or her principal place of abode in the United States for more than one-half of the taxable year;
- (S)he must be at least 25 years old but less than age 65 at the end of the taxable year; and
- The individual can’t be claimed as a dependent of another taxpayer for any tax year beginning in the year the credit is being claimed.
A 22-year-old who is married to an 18-year-old without a qualifying child does not meet the requirements for the Earned Income Credit.
Jones Corporation hired a new employee on March 12, 2022. The new employee was a long-term family assistance recipient and received qualified first-year wages in the amount of $12,000 during 2022. An additional $3,500 of wages was earned between January 1 and March 11, 2023. In 2023, Jones paid this employee $15,000 of wages. Only $11,500 of the wages were attributable to the portion of the calendar year after March 11. What is Jones Corporation’s allowable Work Opportunity Tax Credit for 2023?
A. $4,000
B. $7,500
C. $5,250
D. $5,000
D. $5,000
Employers are allowed a credit in the amount of 50% of the first $10,000 of qualified second-year wages paid to employees who are long-term family assistance recipients. Therefore, Jones Corporation is allowed a credit of $5,000 for 2023. Note that the combined credit for the 2 years may not exceed $9,000 per qualified employee.
An individual taxpayer reports the following items for the current year:
What is the taxpayer’s adjusted gross income for the year?
A. $72,000
B. $70,000
C. $74,000
D. $77,000
C. $74,000
The taxpayer has active income of $74,000 ($70,000 ordinary income from Partnership A + $4,000 short-term capital gain). The amount of loss attributable to a person’s passive activities is allowable as a deduction only against, and to the extent of, gross income or tax attributable to those passive activities (in the aggregate). Therefore, although the taxpayer has gross income from passive activities of $7,000, this income is offset by $7,000 of passive activity loss from Partnership B. The excess $2,000 passive activity loss ($9,000 – $7,000) is deductible or creditable in a future year, subject to the same limits. Since all of the taxpayer’s passive activity income is offset by the passive activity loss, the taxpayer’s adjusted gross income for the year is $74,000.
Mary files as head of household and has three dependent children, ages 15, 16, and 19. Mary and the children are U.S. citizens. Her only income is a salary of $202,500. Her tax is $37,324. How much Child Tax Credit and Credit for Other Dependents is she allowed in 2023?
A. $4,350
B. $150
C. $6,000
D. $4,500
A. $4,350
For purposes of eligibility for the Child Tax Credit, a qualifying child is a child, descendant, stepchild, or eligible foster child. The child must also be under the age of 17 and be claimed as a dependent by the taxpayer. The credit is $2,000 per qualifying child. Also, a Credit for Other Dependents of $500 is allowed for each qualifying relative. However, the credit begins to phase out when modified AGI reaches $200,000 for single and head of household filers. The credit is reduced by $50 for each $1,000, or fraction thereof, of modified AGI above the thresholds. Accordingly, Mary is allowed a Child Tax Credit of $4,500 before the credit is reduced by the threshold, because two children each qualify for the $2,000 credit and the third is a qualified relative. Her credit is reduced by $150 [($202,500 – $200,000) ÷ $1,000 = 2.5 (rounded to 3) × $50], thus allowing Mary a credit of $4,350 ($4,500 – $150).
Dietz is a passive investor in three activities which have been profitable in previous years. The profit and losses for the current year are as follows:
What amount of suspended loss should Dietz allocate to Activity X?
A. $30,000
B. $22,500
C. $18,000
D. $20,000
B. $22,500
The passive activity income is allocated pro rata between the two activities with passive losses. As Activity X accounts for 37.5% ($30,000 ÷ $80,000 total loss) of the passive losses, it is allocated $7,500 ($20,000 × 37.5%) of the passive activity income. This results in a net $22,500 ($30,000 – $7,500) suspended passive activity loss allocable to Activity X.
With regard to the passive loss rules involving rental real estate activities, which one of the following statements is correct?
A. Passive rental activity losses may be deducted only against passive income, but passive rental activity credits may be used against taxes attributable to nonpassive activities.
B. The term “passive activity” loss limitations does not apply to a rental real estate activity when the individual performs more than 50% of his or her personal services during the year in real property trades or businesses in which (s)he materially participates and when at least 750 hours of service is performed in those real property trades or businesses in which (s)he materially participates.
C. Gross investment income from interest and dividends not derived in the ordinary course of a trade or business is treated as passive activity income that can be offset by passive rental activity losses when the “active participation” requirement is not met.
D. The passive activity rules do not apply to taxpayers whose adjusted gross income is $300,000 or less.
B. The term “passive activity” loss limitations does not apply to a rental real estate activity when the individual performs more than 50% of his or her personal services during the year in real property trades or businesses in which (s)he materially participates and when at least 750 hours of service is performed in those real property trades or businesses in which (s)he materially participates.
Passive activities generally include any activities involving the conduct of a trade or business or the production of income in which the taxpayer does not materially participate. However, an individual may avoid passive activity limitation treatment on a rental real estate activity if two requirements are met: (1) More than 50% of the individual’s personal services performed during the year are performed in the real property trades or businesses in which the individual materially participates, and (2) the individual performs more than 750 hours of service in the real property trades or businesses in which the individual materially participates. If 50% or less of the personal services performed are in real property trades or businesses, the individual will be subject to the passive activity limitation rules.
The XYZ Partnership was formed on January 1 of the current year and incurred a $48,000 loss for the year ending December 31 of the same year. Each of the three partners share profits and losses equally. Mr. Y is a passive investor in the partnership. On January 1 of the current year, Y contributed $6,000. Mr. Y contributed $10,000 more during the year and had draws of $2,500. The partnership has no portfolio income and no partnership liabilities. What is Y’s deductible loss from XYZ for the year if he had $9,500 in income from other passive investments?
A. $16,000
B. $23,500
C. $9,500
D. $13,500
C. $9,500
A partner may deduct his or her distributive share of partnership loss only to the extent of his or her adjusted basis in the partnership at the end of the year in which the loss occurs [Sec. 704(d)]. Further, loss from a passive investment can offset income from passive investments only (Sec. 469). Y’s adjusted basis at year end is
Y’s distributable share of the loss is $16,000 ($48,000 × 1/3). Y’s allowable loss for the year is limited to his December 31 adjusted basis of $13,500. It is further limited to income from other passive investments of $9,500.
Which of the following credits is a combination of several tax credits to provide uniform rules for the current and carryback-carryover years?
A. Research Credit.
B. Minimum Tax Credit.
C. General Business Credit.
D. Foreign Tax Credit.
C. General Business Credit.
The General Business Credit is a set of several credits commonly available to businesses, including credits for investment, research, and work opportunity jobs, among others.
Lee qualified as head of a household for 2023 tax purposes. Lee’s 2023 taxable income was $100,000, exclusive of capital gains and losses. Lee had a net long-term capital loss of $8,000 in 2023. What amount of this capital loss can Lee offset against 2023 ordinary income?
A. $0
B. $4,000
C. $8,000
D. $3,000
D. $3,000
Capital losses offset capital gains. Excess of capital losses over capital gains (net capital loss) is deductible against ordinary income, but only up to $3,000 in the current tax year.
Which one of the following is deductible in computing a net operating loss for an individual taxpayer?
A. Business capital losses in excess of business capital gains.
B. Nonbusiness deductions in excess of nonbusiness income.
C. NOL carryovers from other years.
D. Loss on disposition of rental property.
D. Loss on disposition of rental property.
A loss on the disposition of rental property is allowed in computing a net operating loss (NOL) under Sec. 172.
Destry, a single taxpayer, age 35, reported the following on his 2023 Form 1040, U.S. Individual Income Tax Return:
What is Destry’s net operating loss?
A. $16,000
B. $7,000
C. $9,000
D. $20,850
B. $7,000
A net operating loss is defined as the excess of allowable deductions (as modified) over gross income. An NOL generally includes only items which represent business income or loss. Personal casualty losses and wage or salary income are included as business items. Nonbusiness deductions in excess of nonbusiness income must be excluded. Interest and dividends are not business income.
The nonbusiness capital loss cannot be deducted. The nonbusiness deductions (the standard deduction) exceed the nonbusiness income (interest), and both items are excluded from the NOL calculation.
In 2023, Alex Burgos, who is a 24-year-old student, paid $600 to Rita, his ex-wife, for child support. Under the terms of his 2023 divorce decree, Alex claims as a dependent his 3-year-old son, William, who lived with Rita for the entire year. Alex’s only income in 2023 was from wages of $18,950, resulting in an income tax of $510. How much is Alex’s Earned Income Credit for 2023?
A. $6,604
B. $600
C. $0
D. $3,995
C. $0
Alex does not have a qualifying child since his son does not live with him for more than one-half of the tax year. An individual eligible for the Earned Income Credit without a qualifying child is one who meets three qualifications: (1) The individual has a principal place of abode in the United States for more than one-half of the tax year; (2) the individual is at least 25 years old and not more than 64 at the end of the tax year; and (3) the individual cannot be claimed as a dependent of another taxpayer for the year the credit is being claimed. Since Alex is only 24, he does not meet the qualifications.
If an individual taxpayer’s passive losses and credits relating to rental real estate activities cannot be used in the current year, then they may be carried
A. Back 2 years or forward up to 20 years, at the taxpayer’s election.
B. Forward up to a maximum period of 20 years, but they cannot be carried back.
C. Forward indefinitely or until the property is disposed of in a taxable transaction.
D. Back 2 years, but they cannot be carried forward.
C. Forward indefinitely or until the property is disposed of in a taxable transaction.
Disallowed passive activity losses (and credits) are carried forward and used to offset passive activity income (and taxes) in later years. This applies to passive losses and credits from rental real estate activities or from any other passive activity. The carryover is accomplished by treating the disallowed loss from each activity as a deduction for the activity in the following year. In this manner, the carryforward is indefinite. If the entire interest in a passive activity is disposed of in a taxable transaction in a later year, the passive loss may be used at that time.
Don Wolf became a general partner in Gata Associates on January 1, 2023, with a 5% interest in Gata’s profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2023, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf’s passive loss (before any limitation) for 2023 is
A. $6,000
B. $5,000
C. $0
D. $4,000
B. $5,000
In general, losses arising from one passive activity may be used to offset income from other passive activities but may not be used to offset active or portfolio income. Wolf’s $5,000 operating loss ($100,000 × 5%) may not be used to offset his $1,000 portfolio income ($20,000 × 5%); i.e., interest and dividends are portfolio income. Therefore, his passive loss for 2023 is his $5,000 operating loss. The losses may be carried forward indefinitely or until the entire interest is disposed of.
Which of the following credits can result in a refund even if the individual had no income tax liability?
A. Foreign Tax Credit.
B. Earned Income Credit.
C. Elderly and Disabled Credit.
D. Child and Dependent Care Credit.
B. Earned Income Credit.
A refundable credit is payable as a refund to the extent the credit amount exceeds tax otherwise due. Some of the refundable credits are credits for taxes withheld, overpayments of income tax, and the Earned Income Credit.
Which of the following is a true statement concerning losses from passive activities?
A. The losses may offset passive income, such as interest and dividends, but not business income or earned income.
B. Losses from one passive activity may offset income from another passive activity.
C. Losses from each passive activity are not deductible, regardless of income earned in other passive activities.
D. The rules apply to losses but not credits.
B. Losses from one passive activity may offset income from another passive activity.
In general, losses from passive activities may not offset nonpassive income, such as salary, interest, dividends, or active business income (Sec. 469). However, deductions from one passive activity may offset income from the same passive activity, and losses from one passive activity may generally offset income from another passive activity.
In Year 1, Angie purchased a general partnership interest in Partnership X. Angie was at risk for $20,000. In Year 1, Angie’s share of losses was $25,000 and, in Year 2, the partnership broke even. Which of the following is true with respect to the at-risk rules?
A. Angie can deduct only $2,500 in Year 2 even if she increases her amount at risk by $5,000.
B. Angie cannot deduct any amount in Year 2, even if the partnership incurs recourse debt on tangible personal property, and Angie’s share is $10,000.
C. Angie can deduct $5,000 in Year 2 if she increases her amount at risk by $5,000.
D. Angie can deduct $5,000 only when her share of the partnership income is at least $5,000.
C. Angie can deduct $5,000 in Year 2 if she increases her amount at risk by $5,000.
Any loss from an activity not allowed for a taxable year due to the limitations of Sec. 465 may be treated as a deduction in succeeding taxable years [Sec. 465(a)(2)]. In the next taxable year, the at-risk rules will be applied again to the carryover amount. If an individual’s at-risk amount increases, the unused loss from a prior year may be deducted to the extent of the increased at-risk amount. Therefore, if Angie’s amount at risk is increased by $5,000 in Year 2, she can deduct the $5,000 not deductible in Year 1.
The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000 before considering the rental activity. How much of the rental loss, if any, are the Jacksons entitled to deduct?
A. $30,000
B. $25,000
C. $15,000
D. $0
C. $15,000
Generally, an active participant in rental real estate may deduct up to $25,000 per year in rental real estate losses. For taxpayers whose MAGI exceeds $100,000, the amount of the active real estate loss deduction is reduced for 50% of the excess of MAGI over $100,000. For the Jacksons, this means the currently deductible portion of real estate losses is $15,000 {$25,000 – [($120,000 MAGI – $100,000 base amount) × 50% limitation]}.
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
A. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
B. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
C. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
D. Any losses in excess of the at-risk amount are carried back 2 years against activities with income and then carried forward for 20 years.
A. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
The losses are carried forward without expiration and are deductible against income in future years from that activity.
Which of the following statements about losses in federally declared disaster areas is false?
A. The taxpayer has the option of deducting the loss on the return for the year immediately preceding the year in which the disaster actually occurred.
B. Disaster area loss deductions are subject to a per-event and AGI floor.
C. Once made, the election to deduct the loss on the prior-year return cannot be revoked.
D. Any AGI limitations are based on the AGI of the year the loss is reported.
C. Once made, the election to deduct the loss on the prior-year return cannot be revoked.
If a taxpayer sustains a loss from a disaster in an area subsequently designated as a federal disaster area, a special rule may help the taxpayer to cushion his or her loss. The taxpayer has the option of deducting the loss on his or her return for the year in which the loss occurred or on the return for the previous year. Revocation of the election to deduct the loss on the preceding year’s tax return may be made before the expiration of time for filing the return for the year of loss. The calculation of the deduction for a disaster loss follows the same rules as those for nonbusiness casualty losses. The AGI floor is based on the AGI of the return year the loss is reported (e.g., current or preceding).
Which of the following, if any, are among the requirements to enable a taxpayer to be classified as a “qualifying surviving spouse”?
A. I only.
B. Neither I nor II.
C. II only.
D. Both I and II.
B. Neither I nor II.
Filing as a qualifying surviving spouse requires the individual’s spouse to have died during one of the previous 2 tax years. In addition, the survivor must maintain a household that is the principal place of residence for a dependent child. “Maintain” means the spouse furnishes over 50% of the costs of the household for the entire year.
To qualify for the Child and Dependent Care Credit on a joint return, at least one spouse must
Have an Adjusted Gross Income of $15,000 or Less = No
Be Gainfully Employed when Related Expenses Are Incurred = No
The IRC allows a credit to a provider of care to dependents for a limited portion of expenses necessary to enable gainful employment. The credit claimant must have qualified child care expenses when the claimant is employed or actively seeking gainful employment. The credit amount is not eliminated when AGI exceeds $15,000, only phased down from 35% to 20% in increments of 1% for each $2,000 by which AGI exceeds $15,000.
The at-risk rules do not apply to
A. A closely held corporation for which 50% or more of its gross receipts are from equipment leasing.
B. The holding of real property placed in service in the current year.
C. A corporation with five or fewer individuals owning more than 50% during the last half of the year.
D. Exploring for oil and gas resources.
A. A closely held corporation for which 50% or more of its gross receipts are from equipment leasing.
The at-risk rules apply to most business and income-producing activities. However, there is an exception for a closely held corporation actively engaged in equipment leasing. A closely held corporation for this purpose is defined as one owned more than 50% during the last half of the year by five or fewer individuals. At least 50% of the gross receipts must be from equipment leasing for the corporation to be considered “actively engaged” in equipment leasing [Sec. 465(c)(4)(B)].
Which of the following is not an example of a passive activity?
A. The rental of office equipment with no provision of unusual services.
B. A working interest in oil and gas property when the taxpayer-owner has unlimited liability and does not materially participate in the activity.
C. A limited partner’s interest in a limited partnership.
D. The farming of land when the taxpayer owning the land has hired others to manage operations.
B. A working interest in oil and gas property when the taxpayer-owner has unlimited liability and does not materially participate in the activity.
Passive activities generally include any activity involving the conduct of a trade or business or the production of income and in which the taxpayer does not materially participate (Sec. 469). However, Sec. 469(c)(3) excludes from the passive activity definition any working interest in oil or gas property in which the form of ownership does not limit liability. This is true whether or not the taxpayer-owner materially participates in the activity.
Mr. Klein is 67 years old, single, and retired. During 2023, he received a taxable pension from his former employer in the amount of $4,000. His adjusted gross income is $15,200, and he received $500 of nontaxable Social Security benefits. His tax before credits is $50. What is Mr. Klein’s credit for the elderly?
A. $173
B. $98
C. $0
D. $50
D. $50
An individual who has attained age 65 is allowed a credit equal to 15% of the individual’s reduced base amount. For a single individual, the initial base amount is $5,000, reduced by any amounts received as Social Security benefits or otherwise excluded from gross income. The base amount is also reduced by one-half of the excess of AGI over $7,500 (for a single individual).
Since the taxpayer’s tax before credits is $50, only $50 of the credit can be claimed.
Based on the following information, compute the 2023 net operating loss (NOL) that an individual can carry over to 2024.
A. $20,850
B. $7,000
C. $23,000
D. $8,000
D. $8,000
A net operating loss is defined as the excess of allowable deductions (as modified) over gross income [Sec. 172(c)]. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage or salary income are included as business items. Nonbusiness deductions in excess of nonbusiness income must be excluded. Interest and dividends are not business income.
Nonbusiness deductions (the standard deduction) are not allowed because there is only $1,000 of nonbusiness income. The NOL carryover from 2022 is not allowed in arriving at the 2023 NOL. The entire NOL can be carried over to 2024.
A taxpayer employed full-time as an engineer has the following income items:
What amount is the taxpayer’s passive income?
A. $17,500
B. $18,500
C. $2,500
D. $15,000
D. $15,000
A passive activity is either a trade or business in which the person does not materially participate or a rental activity. Passive activity rules do not apply to
- Active income/loss/credit
- Portfolio income/loss/credit
- Casualty and theft losses, vacation home rental, qualified home mortgage interest, business use of home, or a working interest in an oil or gas well held through an entity that does not limit the person’s liability
Therefore, the $15,000 rental income is the only income item listed that is considered passive income.
Mr. Condor began producing picture films in the current year. During the current year, he made the following contributions to his business:
Under the at-risk rules, Mr. Condor is considered to be at risk in the amount of
A. $80,000
B. $55,000
C. $60,000
D. $45,000
B. $55,000
A taxpayer is considered at risk for cash contributions to the activity, the adjusted basis of other property contributed to the activity, and amounts borrowed for use in the activity, if the taxpayer is personally liable on the debt or has pledged property not used in the at-risk activity as security for the debt [Sec. 465(b)]. A taxpayer is generally not considered at risk for nonrecourse debt secured by property used in the activity. Mr. Condor is considered at risk for the following:
Select the true statement based on the following information for the taxpayer’s current year:
A. The suspended loss of activity C is lost due to disposal of the activity.
B. The suspended loss reduces activity B income to $0 and the $2,000 balance of loss is lost.
C. The suspended loss reduces activity A income to $23,000.
D. The suspended loss reduces activity A income to $33,000.
D. The suspended loss reduces activity A income to $33,000.
Suspended losses from a passive activity become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. The loss is deductible first against net income or gain from other passive activities, and any remainder of the loss is treated as nonpassive loss deduction. Therefore, the activity C $12,000 suspended loss first reduces the activity B $10,000 income to $0, and the remaining $2,000 reduces the activity A income to $33,000.
A taxpayer plans to sell the following assets:
If the taxpayer projects a $10,000 loss on each asset sale, then the losses will reduce adjusted gross income by what amount?
A. $20,000
B. $23,000
C. $30,000
D. $13,000
D. $13,000
A taxpayer who actively participates in renting a home is allowed a maximum loss deduction of up to $25,000. This taxpayer is only projecting a loss of $10,000. Loss on the investment is limited to $3,000. Personal and hobby losses are not deductible. Thus, the taxpayer will reduce adjusted gross income by $13,000 ($10,000 + $3,000).
In the current year, a taxpayer reports the following items:
During the year, the taxpayer disposed of the interest in partnership Y, which had a suspended loss carryover of $5,000 from prior years. What is the taxpayer’s adjusted gross income for the current year?
A. $65,000
B. $23,000
C. $28,000
D. $60,000
B. $23,000
The salary and income from partnership X are taxable. The amount of a loss attributable to a person’s passive activities is allowable as a deduction only to the extent of income attributable to passive activities. However, suspended and current-year losses from passive activities become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. Therefore, the $37,000 passive activity loss from partnership Y and the suspended loss carryover of $5,000 are fully deductible. The taxpayer’s AGI is
In the current year, a taxpayer reports the following items:
During the year, the taxpayer disposed of the interest in partnership N, which had a suspended loss carryover of $25,000 from prior years. What is the taxpayer’s adjusted gross income for the current year?
A. $140,000
B. $80,000
C. $115,000
D. $55,000
D. $55,000
The salary and income from partnership M are taxable. The amount of a loss attributable to a person’s passive activities is allowable as a deduction only to the extent of income attributable to passive activities. However, suspended and current-year losses from passive activities become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. Therefore, the $60,000 passive activity loss from partnership N and the suspended loss carryover of $25,000 are fully deductible. The taxpayer’s AGI is
Jill Perry invested $10,000 for a 5% interest in a limited partnership on January 1, Year 1. There is one general partner with a 50% interest. In Year 1, the partnership purchased an office building to rent and incurred a nonrecourse debt of $100,000 to a bank paying interest for only 5 years. The debt has no conversion feature. The partnership incurred a loss of $150,000 in Year 1 and a loss of $200,000 in Year 2. How much can Jill deduct each year, ignoring any passive loss rules?
Year 1 = $7,500
Year 2 = $7,500
A limited partner in a partnership is considered to have at risk the amount of cash and adjusted basis of property contributed to the partnership (or used to purchase the partnership interest) and also a share of any qualified nonrecourse financing on real estate (Sec. 465). The existence of a general partner does not affect the fact that Jill will receive a 5% allocation of the nonrecourse debt, provided that no partner has any personal liability on this particular debt. Therefore, Jill’s at-risk amount is $15,000 ($10,000 invested + $5,000 share of nonrecourse debt).
Her share of loss in Year 1 is $7,500 ($150,000 loss × 5% interest), which may be deducted in full. Her share of loss in Year 2 is $10,000 ($200,000 loss × 5% interest), but the limitation on the Year 2 deduction is $7,500 ($15,000 at risk – $7,500 deducted in Year 1). Note that there may be further limitations on the deduction of a loss based on the passive loss rules.
A married couple reported the following items for the current year:
Both spouses actively participate in the rental real estate activities. What is the taxpayers’ adjusted gross income on a joint return for the year?
A. $95,000
B. $98,500
C. $94,500
D. $96,500
C. $94,500
The couple’s AGI is $94,500 ($95,000 + $1,000 + $500 – $2,000). The loss from rental real estate activity is fully deductible because of the exception to the passive activity loss (PAL) limitation rules regarding rental real estate activity. This exception states that a person who actively participates in a rental real estate activity is entitled to deduct up to $25,000 of losses from other than passive income. This exception to the general PAL limitation rule applies to a person who (1) actively participates in the activity, (2) owns 10% or more of the activity (by value) for the entire year, and (3) has MAGI of less than $150,000.
Timothy is an equal partner in XYZ Partnership and is entitled to 50% of profits, losses, and capital. During Year 1, XYZ engaged in the following transactions:
What is Timothy’s at-risk loss limitation in Year 1?
A. $105,000
B. $167,500
C. $125,000
D. $62,500
C. $125,000
Timothy personally guaranteed the recourse debt; therefore, the entire $125,000 is at risk for Timothy. The $35,000 nonrecourse note is secured by the warehouse and thus does not affect Timothy’s at-risk loss limitation. The $50,000 nonrecourse note is convertible to ownership interest and thus not included in Timothy’s at-risk loss limitation.
In the current year, a taxpayer reports the following items:
During the year, the taxpayer disposed of the interest in partnership B, which had a suspended loss carryover of $10,000 from prior years. What is the taxpayer’s adjusted gross income for the current year?
A. $70,000
B. $60,000
C. $20,000
D. $30,000
C. $20,000
The salary and income from partnership A are taxable. The amount of a loss attributable to a person’s passive activities is allowable as a deduction only to the extent of income attributable to passive activities. However, suspended and current-year losses from passive activities become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. Therefore, the $40,000 passive activity loss from partnership B and the suspended loss carryover of $10,000 are fully deductible. The taxpayer’s AGI is
