REG: Chapter 11 Flashcards
Losses and Limitations
When is a hobby considered an activity for profit?
- The activity generates a profit in 3 out of 5 tax years
- If the activity is from breeding, showing or racing horses, the profit is 2 out of 7 years
Losses and Limitations
How are net capital losses reported for corporations?
- Capital losses are only applied to offset capital gains
- Capital losses can be carried back 3 years and carried forward 5 years
- All carryforwards are classified as Short-Term Capital Losses
- If there are no capital gains reported, or there is an excess of capital losses, it is deductible as ordinary income
Losses and Limitations
How are net capital losses reported for individuals?
- Net Capital Gains = Net of Long Term Capital Gains - Short Term Capital Losses
- Net Short Term Capital Gains are treated as ordinary income
- Net Short Term Capital Gains may offset Long Term Capital Losses
- Mamimum loss deduction is $3,000 / $1,500 (MFS)
- Carryforward is indefinite
- No carryover is allowed from a decedent
- Passive activity losses can be used to offset income from a rental residence
Losses and Limitations
What is Net Operating Loss (NOL)?
- It is the excess of allowable deduction over modified AGI
- An NOL includes items that are used to calculate ordinary business income or loss
- Nonbusiness deductions, interest and dividends are excluded because they are not ordinary business income
- A loss due to the disposal of rental property is allowed in computing a NOL
Losses and Limitations
How is a net operating loss (NOL) Reported?
- A net operating loss is limited to 80% of taxable income
- It is carry forward indefinitely
- It is not carried back
Losses and Limitations
When does the passive activity rules apply?
- Individuals
- Closely held C Corporations
- Estates
- Trusts
- Personal Service Corporations
Losses and Limitations
What are the limitation rules for Passive Activity Losses?
- Income must have been earned in the tax year in order to report a passive activity loss
- If a loss is reported, then the loss will be carryfoward
Losses and Limitations
How is the suspended loss calculated when there are multiple losses?
- The losses are pro-rated against the income
- The pro-rated amount is then deducted from the applicable loss
Losses and Limitations
What is the calculation to determine loss of rental activity as an offset against income from nonpassive sources?
- The dollar threshold is $100,000
- If the taxpayer actively participates in rental real estate activity has a loss limit of $25,000
- If there is more than one rental activity, net all activities. If there is still loss, calculate for the allowable loss
Calculation to determine Allowable Loss
* MAGI - Threshold = Excess
* Excess x 50% = Reduction
* Loss Limit - Reduction = Allowable Loss
Loss and Limitations
What is the exception regarding passive activity loss limitation in regard to real estate activity?
The $25,000 maximum is not used if:
* The taxpayer actively participates in the activity
* Owns 10% or more of the activity, by value, for the entire year
* MAGI is less than 150,000
Losses and Limitations
When are losses from real estate no longer subject to the passive activity rules?
- More than 50% of the taxpayer’s earned income is from services performed at the property
- The taxpayer performs more than 750 hours of service at the property
Losses and Limitations
How is rental loss determine for a company that is exempt from the passive activity rules?
The loss may be offset by active rental real estate income, as well as portfolio income
Example
Active Rental Income: $250,000
Portfolio Income: $150,000
Passive Loss: ($300,000)
Income will be offset by $250,000 of rental income and $50,000 of portfolio income
Losses and Limitations
How is a loss carryfoward applied when the passive activity that has the loss is disposed of?
The carryfoward loss and the current loss for the same passive activity are fully deductible in the year of disposal
Losses and Limitations
How is AGI calculated when there is a disposal of Passive Activity?
Salary
Income from nonpassive activity
(Disposed loss of Passive Activity)
(Current loss of the Same Passive Activity that is being Disposed)
Losses and Limitations
What is the At-Risk Limitation?
- It is the amount of the taxpayer’s economic investment in the activity
- It represents the economic risk to which the taxpayer is exposed
- The at-risk amount may be computed as the taxpayer’s tax-basis less their share of the entity’s non-recourse liabilities
- Non-recourse liabilities increase the taxpayer’s tax basis, not their at-risk amount
- Exception applies to non-recourse liabilities that are secured by real property. This increases the tax basis and the at-risk basis of the taxpayer
- Partners can only deduct a partnership ordinary loss based on the partner’s at-risk amount
