Passive Activity - Review Questions Flashcards
Two business operations conducted at separate locations can never be combined into the same activity.
Choose the best answer.
True
False
False
Taxpayers may treat one or more activities as a single activity only if they constitute an appropriate economic unit. Once the activities are established, taxpayers must be consistent in grouping their activities in subsequent years unless material changes in the facts and circumstances clearly make the groupings inappropriate.
How do closely held C corporations differ from Personal Service Corporations (PSCs)?
A PSC is a regular C corporation where the owner-employees carry on personal services. However, a corporation is not a PSC unless owner-employees own more than 10% of the value of the stock.
Joe Jones has the following passive activity for the current year:
($5,000) loss from ABC - a publicly traded partnership
$7,000 income from DEF – a publicly traded partnership
($10,000) loss from CHI, a private interest in a limited partnership
$8,000 income from Solar Winds, a private interest in an S-Corporation
How much of these passive losses can be used in the current year?
($8,000) loss can be used from CHI and netted against the $8,000 income from Solar Winds. The loss from ABC, must be suspended and can only be used when either ABC generates sufficient income in the future, or when ABC is sold in a taxable transaction.
Joe Jones has the following passive activity for the current year:
($5,000) loss from ABC - a publicly traded partnership
$7,000 income from DEF – a publicly traded partnership
($10,000) loss from CHI, a private interest in a limited partnership
$8,000 income from Solar Winds, a private interest in an S-Corporation
What is the net income from the passive activity?
$7,000 is the net income from passive activity. DEF has to be reported, ABC can’t be used, and only ($8,000) loss from CHI can be used to offset income from Solar Winds.
Joe Jones has the following passive activity for the current year:
($5,000) loss from ABC - a publicly traded partnership
$7,000 income from DEF – a publicly traded partnership
($10,000) loss from CHI, a private interest in a limited partnership
$8,000 income from Solar Winds, a private interest in an S-Corporation
How much of the losses will be suspended and carried over?
($7,000) of losses must be suspended [($5,000) from ABC and ($2,000) from CHI].
Passive activity losses that are disallowed as deductions for the year in which they are incurred, and then are carried over indefinitely and treated as losses allocable to that activity in the following tax years, are called _______ losses or carryovers.
Suspended
Passive activity losses that are disallowed as deductions for the year in which they are incurred, and then are carried over indefinitely and treated as losses allocable to that activity in the following tax years, are called suspended losses or carryovers.
Bess owns activity X which produced a $15,000 passive loss last year. Bess’s only income last year was wages of $20,000. Bess is a material participant in activity X this year when it produces a $10,000 loss. This year, Bess’s wages are $30,000. Bess also has passive income from activity Y of $8,000 this year. What is the total passive activity loss carryover to next year?
Choose the best answer.
1) $0
2) $2,000
3) $7,000
4) $17,000
3) $7,000
The $15,000 of passive activities losses from last year is offset by $8,000 of passive income from activity Y this year. This leaves $7,000 to be carried over to next year. The $10,000 of loss from activity X is not passive this year since Bess is now a material participant.
Andre Taylor is considering renting out his home for two weeks (14 days) during the summer. He is, however, unsure of the income tax consequences. Which one of the following statements is correct?
1) The rental income is includible in full in gross income.
2) The rental income is not includible in income.
3) The rental income is includible in income, but mortgage interest and property taxes allocable to the rental are deductible for AGI.
4) The rental income will not be included in income if it is less than $1,000.
2) The rental income is not includible in income.
Up to two weeks (14 days) is excluded if in fact that is the only rental activity.
Aaron rents his condo for $1,500 per month. Total rental and personal use days for the current year was 210 days and 20 days, respectively.
What are the tax consequences for Aaron?
Choose the best answer.
1) The property is primarily rental use. Aaron is permitted to deduct rental expenses (not personal expenses) associated with the use on Schedule E of IRS Form 1040. Aaron is also permitted to take a possible $25,000 deduction for rental losses.
2) The property is mixed use. Aaron is permitted to deduct rental expenses (not personal expenses) associated with the use on Schedule E of IRS Form 1040. Aaron is also permitted to take a possible $25,000 deduction for rental losses.
3) The property is mixed use. Aaron is permitted to deduct rental expenses (not personal expenses) associated with the use on Schedule E of IRS Form 1040. Aaron is not permitted to take a $25,000 deduction for possible rental losses.
4) The property is primarily personal use. No income or expenses related to the rental will be reported on Aaron’s income tax return.
1) The property is primarily rental use. Aaron is permitted to deduct rental expenses (not personal expenses) associated with the use on Schedule E of IRS Form 1040. Aaron is also permitted to take a possible $25,000 deduction for rental losses.
The home is primarily rental use. The rule states that property will be deemed primarily rental use if personal use is less than the greater of 14 days per year or 10% of the rental days. In this case, the property was rented 210 days, thus Aaron’s personal use is limited to the greater of 14 days or 21 days (10% × 210 rental days). Aaron only used the property for 20 days, therefore the property is primarily rental use.
Which of the following are requirements for a taxpayer who materially participates in a real property trade or business to be able to deduct any losses from the business?
I) More than 50% of the individual’s personal services during the tax year are performed in the real property trades or businesses in which the individual materially participates.
II) More than 10% of the individual’s net assets at the end of the tax year are invested in the real property trades or businesses in which the individual materially participates.
III) The individual performs more than 750 hours of service in the real property trades or businesses in which the individual materially participates.
I only
I and II only
I and III only
II and III only
I and III only
More than 50% of the taxpayer’s personal service time as well as more than 750 hours are both requirements in order to qualify as a real estate professional.
Janice Bucknell has the following current-year passive income and loss amounts:
$18,000 income from ABC limited partnership (publicly traded)
($14,000) loss from DEF limited partnership (publicly traded)
$13,000 income from GHI limited partnership (non-publicly traded)
($16,000) loss from JKL S-corp (non-publicly traded)
What is the total amount of passive losses that may be deducted during the current year?
1) $13,000
2) $14,000
3) $16,000
4) $30,000
1) $13,000
Only $13,000 of the $16,000 loss from JKL may be deducted against the $13,000 income from GHI. Please note that since ABC is publicly traded the income must be reported and since DEF is publicly traded, the loss must be suspended.
Danielle Carter has an interest in a limited partnership, for which she received Schedule K-1 reporting pass-through income of $5,000. Additionally, Danielle owns a business named flowers on wheels, which is an S-corporation that operates a flower cart for some of the local hospitals on most weekends. Danielle hired several part time high school students last year to wheel the cart around and sell flowers. Danielle did however, manage to work 100 hours herself for this business. Danielle’s 100 hours worked were more than any of the part-time help she hired. FLOWERS ON WHEELS experienced a loss of $18,000 last year. Which one of the following statements is correct?
1) For tax reporting purposes, Danielle’s interest in the limited partnership and flowers on wheels will net to a loss of ($13,000).
2) For tax reporting purposes, Danielle’s interest in the limited partnership and flowers on wheels will net to a profit of 0.
3) Assuming Danielle’s basis in flowers on wheels is at least $18,000, she will be able to deduct the entire loss for tax reporting purposes.
4) If Danielle’s basis in flowers on wheels is only $10,000 (before the $18,000 loss) she will only be able to deduct $10,000 based on the at-risk rules and therefore she will report a net loss of ($5,000) on her tax return for the combined activity of the limited partnership and the S-corporation.
2) For tax reporting purposes, Danielle’s interest in the limited partnership and flowers on wheels will net to a profit of 0.
The key to this question is determining if FLOWERS ON WHEELS is considered to be passive income or active income. Danielle works exactly 100 hours and more than anyone else. In order for her to be considered a material participant – she would have had to work more than 100 hours and more than anyone else. Since she has not met the material participation standard, this entity will be classified as passive. Therefore, the only loss that is allowed is to the extent of the passive income in the limited partnership of $5,000. The two will net to 0 with $13,000 being carried over.
Rex has a passive interest in an LLC that began with a cost basis of $75,000. Rex also has a passive interest in a S-corporation which had a cost basis of $50,000 to begin the year. Rex just received his K-1s from the past year. His LLC showed a loss passed-through to him of $80,000 and the S-Corp’s K-1 passed-through income of $10,000. How much of Rex’s loss on the LLC is suspended due to the at-risk rules and how much is suspended due to the passive activity rules? 1) At-risk Loss 2) Passive Loss
1) $0; 2) $65,000
1) $0; 2) $5,000
1) $5,000; 2) $5,000
1) $5,000; 2) $65,000
1) $5,000; 2) $65,000
Prior to the K-1, Rex’s adjusted tax basis in the LLC was $75,000. Therefore $5,000 of the $80,000 loss will be suspended due to the at-risk rules. $75,000 of the loss is then subject to the passive loss rules. Since there is only $10,000 of passive income (from the S-corp) only $10,000 of the $75,000 loss can be used and $65,000 is suspended due to the passive rules.
Rex Remington has the following passive activity items:
Prior-year passive loss carryforward amounts:
($3,000) from ABC PTP
($8,000) from XYZ PTP
Current-year passive income and loss amounts:
$5,000 ABC PTP
$2,000 DEF PTP
$4,000 XYZ PTP
$10,000 CHI
($7,000) JKL
($8,000) RST
Note: PTP denotes Publicly Traded Partnership, all other activity is private interest.
What is the net income reported this year for the PTP activity?
Choose the best answer.
1) $0
2) $1,000
3) $4,000
4) $5,000
3) $4,000
There are two buckets of passive losses you need to break out. The first is the PTP bucket and the other is the other passive loss bucket. The PTP bucket takes each activity separately and the income is reduced to zero for any remaining loss creating a carryforward and cannot be offset by another PTP’s income. However, for the other passive losses, you can reduce the different activity losses but not less than zero in a given tax year with any remaining loss being a carryforward. Therefore, ABC PTP of $5,000 plus the ($3,000) carryforward is $2,000. DEF PTP is $2,000. XYZ PTP of $4,000 plus the ($8,000) is reduced to $0 and provides a $4,000 carryforward. The PTP income is $2,000 for ABC + $2,000 for DEF + $0 for XYZ PTP or a net total of $4,000.
Next, the $10,000 CHI + ($7,000) for JKL + ($8,000) for RST = ($5,000). Because this can’t be less than $0 in the given tax year, $0 is reported with a ($5,000) carryforward. Therefore, the total net income reported this year is $4,000 +$0 or $4,000.
Rex Remington has the following passive activity items:
Prior-year passive loss carryforward amounts:
($3,000) from ABC PTP
($8,000) from XYZ PTP
Current-year passive income and loss amounts:
$5,000 ABC PTP
$2,000 DEF PTP
$4,000 XYZ PTP
$10,000 CHI
($7,000) JKL
($8,000) RST
Note: PTP denotes Publicly Traded Partnership, all other activity is private interest.
How much were the total losses that were used and how much loss is suspended to next year? (Both PTP and private interest)
Choose the best answer.
1) ($13,000) used, ($13,000) suspended
2) ($15,000 used, ($11,000) suspended
3) ($17,000 used, ($9,000) suspended
4) ($19,000 used, ($7,000) suspended
3) ($17,000 used, ($9,000) suspended
There are two buckets of passive losses you need to break out. The first is the PTP bucket and the other is the other passive loss bucket. The PTP bucket takes each activity separately and the income is reduced to zero for any remaining loss creating a carryforward and cannot be offset by another PTP’s income. However, for the other passive losses, you can reduce the different activity losses but not less than zero in a given tax year with any remaining loss being a carryforward. Therefore, ABC PTP of $5,000 plus the ($3,000) carryforward is $2,000. DEF PTP is $2,000. XYZ PTP of $4,000 plus the ($8,000) is reduced to $0 and provides a $4,000 carryforward. The PTP income is $2,000 for ABC + $2,000 for DEF + $0 for XYZ PTP or a net total of $4,000.
Next, the $10,000 CHI + ($7,000) for JKL + ($8,000) for RST = ($5,000). Because this can’t be less than $0 in the given tax year, $0 is reported with a ($5,000) carryforward. Therefore, the total net income reported this year is $4,000 +$0 or $4,000.
The loss in the current year is ($3,000) for ABC PTP + ($4,000) XYZ PTP + ($10,000) of JKL & RST loss against CHI’s income = ($17,000). The suspended loss is ($4,000) for XYZ + ($5,000) loss of JKL & RST that exceeds CHI’s $10,000 of income or ($9,000).
