R1: Individual Tax - Income

Question 1

Can a passive activity loss offset gains from non-passive activity?

Answer 1

Except in the year in which an individual, estate, trust, or closely-held C corporation disposes of an entire interest in a passive activity investment, such taxpayers CANNOT deduct passive activity expenses and losses against income and gain attributable to non-passive activities. Passive losses can only be deducted to the extent of passive gains (can’t create a loss).

Question 2

What type of gain is depreciation recapture?

Answer 2

Ordinary Gain

Question 3

What can happen to an individual’s passive activity losses?

Answer 3

Suspended losses can be carried forward, but NOT back, until utilized.

Question 4

Is interest from US Treasury Bonds included in gross income?

Answer 4

Yes

Question 5

Is workers compensation included in gross income?

Answer 5

No. Damages for personal injury (i.e. workers’ compensation for a job-related injury) are specifically excluded from gross income.

Question 6

Under the uniform capitalization rules applicable to taxpayers with property acquired for resale, what costs should be capitalized with respect to inventory if no exceptions have been met?

Answer 6

Direct materials, direct labor, and factory overhead (applicable indirect costs) are capitalized with respect to inventory under the uniform capitalization rules. Applicable indirect costs include depreciation and amortization, insurance, supervisory wages, utilities, spoilage and scrap, design expenses, R&M and rental of equipment and facilities (including offsite storage), some administrative costs, costs of bonus and other incentive plans, and indirect supplies and other materials (including repackaging costs).