REG 1. M5

Question 1

4 types of loss limitations for individuals

Answer 1

1) Tax Basis Limitation
2) At- Risk limitation
3) Passive-activity loss (PAL) limitation
4) Excess Business loss limitation

Question 2

Which losses related to Business/Entities and which losses flow through the business?

Answer 2

Entities: Tax basis & at risk limitation
Individuals: PAL & excess business loss limitation

Question 3

Name facts on the tax basis limitation

Answer 3

1) Tax basis = ownership interest adjusted for income/deductions
2) Loss = can only flow through individual income tax returns
3) Loss can only be deducted when there is income
4) CF to future years
5) If you sell your share, you LOSE the suspended loss

Question 4

Name facts on the At-Risk limitation

Answer 4

1) At risk represents the taxpayer’s economic risk in the activity
2) Typically the same as owner’s tax basis but EXCLUDES the owner’s share of certain debt
3) A loss in excess of at risk basis is suspended until future basis reinstated
4) CF indefinitely
5) Once sold shares, you can use the suspended loss to offset gain in sale

Question 5

Name facts on the Passive Activity Loss (PAL) limitation

Answer 5

1) Only deduct PAL from passive activity INCOME
2) Cannot offset PAL against active or portfolio income
3) PAL is suspended and CF indefinitely to offset future passive income

Question 6

Name Active Income

Answer 6

1) salaries and wages
2) guaranteed pmts for services
3) taxpayer ACTIVELY participates

Question 7

Name Passive Income

Answer 7

1) taxpayer DOES NOT materially participate
2) Rental real estate income
3) Income from LIMITED partnership = automatically considered passive income

Question 8

Name Portfolio Income

Answer 8

1) Interest
2) Dividends
3) Annuities
4) Capital gains and losses

Question 9

What are is the criteria for material participation in a business?

Answer 9

1) Business activity considered passive activity if taxpayer does NOT materially participate
2) Taxpayer NOT involved in operations of the business
3) Common test– material participant if taxpayer participates MORE than 500+ hours during the tax yera

Question 10

What is the Mom & Pop exception to the PAL?

Answer 10

Individual taxpayer can deduct up to $25,000 of PAL if

1) Actively participates in rental real estate activity
2) Owns at least 10% of rental real estate
* **$25K is reduced by 50% in excess of AGI over $100L. Completely phased out at 150K

Question 11

When does the PAL not apply?

Answer 11

If the taxpayer is considered to be a real estate professional

1) more than 50% of personal services is in real estate
2) Performs more than 750+ hours during the yera

Question 12

Name facts on the Excess Business Loss

Answer 12

• taxpayers are not allowed to deduct an overall excess business loss.
  ** EBL for the year = excess of aggregated business deductions for the year over the sum of aggregate business income for the year + threshold amount
  Threshold for MFJ = 500K Single = 250K.
  **Applies to ALL types of income

Question 13

What is the maximum deduction for net capital losses for individuals?

Answer 13

$3,000 Maximum deduction

**Capital losses are only limited to taxable income

Question 14

How is personal bad debt treated?

Answer 14

A personal bad debt loss is treated as a short-term capital loss in the year debt becomes totally WORTHLESS

Question 15

How is worthless stock and securities treated?

Answer 15

The cost of worthless stock or securities is treated as capital loss, as if they were sold on the last day of the taxable year in which they became totally worthless