REG R1 Incorrect Questions #5 Flashcards
MCQ-06161
The term active participation for a passive activity loss is relevant in relation to:
1. Rental real estate activities.
2. Working interests in oil and gas properties.
3. Passive activities in which the taxpayer materially participates.
4. Passive activities in which the taxpayer does not materially participate.
Explanation
Choice “1” is correct. Active participation in rental real estate activities allows the taxpayer
to deduct losses from the rental activities against other income, subject to limitation.
Choice “2” is incorrect. Active participation is not relevant to working interests in oil and gas
properties.
Choice “3” is incorrect. Material participation requires a higher level of taxpayer involvement
than required by active participation.
Choice “4” is incorrect. Active participation is not relevant to all passive activities.
MCQ-11780 Dietz is a passive investor in three activities that have been profitable in previous years. The profit and losses for the current year are as follows: Gain/(Loss) Activity X (30,000) Activity Y (50,000) Activity Z 20,000 Total What amount of suspended passive activity loss should Dietz allocate to Activity X? 1. $18,000 2. $22,500 3. $20,000 4. $30,000
Explanation
Choice “2” is correct. For the current year, there is a suspended net passive activity loss
(PAL) of $60,000. The loss is allocated between the two activities with passive losses based
on the ratio of each activity’s loss to the total losses. The suspended PAL allocated to X is
$22,500.
Activity X $(30,000)
Activity Y (50,000)
Total losses $(80,000)
Activity X: 30,000 / 80,000 = 37.5% × $60,000 = $22,500
Activity Y: 50,000 / 80,000 = 62.5% × $60,000 = $37,500
Choices “1”, “3”, and “4” are incorrect, per the above explanation.
MCQ-11779
In the current year, a taxpayer reports the following items:
Salary
Ordinary business income from partnership A, in which the taxpayer materially
participates
20,000
Ordinary business loss from partnership B, in which the taxpayer does not
actively participate
(40,000)
During the year, the taxpayer disposed of the interest in partnership B (no gain or loss). The
taxpayer had a suspended passive activity loss (PAL) carryover of $10,000 from prior years
for partnership B. What is the taxpayer’s adjusted gross income for the current year?
1. $70,000
2. $20,000
3. $30,000
4. $60,000
Explanation
Choice “2” is correct. The $50,000 salary and $20,000 ordinary business income from
active partnership A are fully taxable active income. Generally, passive activity losses
(PALs) can only be offset against passive activity income in the current or future years.
However, in the year in which a taxpayer disposes of a passive activity, any current or
suspended PALs for that activity may be offset against any other sources of income (active,
passive, or portfolio). Because the taxpayer disposed of the interest in partnership B during
the current year, the current year PAL of $40,000 and the suspended PALs from prior years
of $10,000 can be offset against the current year active income.
Salary $50,000
Partnership A ordinary business income 20,000
Partnership B ordinary business loss (40,000)
$50,000
Partnership B suspended PALs (10,000)
Adjusted gross income $20,000
Choices “3”, “4”, and “1” are incorrect, based on the explanation above
MCQ-01571
With regard to the inclusion of Social Security benefits in gross income, for the Year 8 tax
year, which of the following statements is correct?
1. The Social Security benefits in excess of modified adjusted gross income are included
in gross income.
2. The Social Security benefits in excess of the modified adjusted gross income over a
threshold amount are included in gross income.
3. The Social Security benefits in excess of one half the modified adjusted gross income
are included in gross income.
4. Eighty-five percent of the Social Security benefits is the maximum amount of benefits
to be included in gross income.
Explanation
Choice “4” is correct. The amount of Social Security benefits that is taxed is dependent on
whether the combined income (AGI plus interest on tax-exempt bonds and 50 percent of
the Social Security benefits) is greater than a threshold amount. If the combined income is
less than the threshold, the amount taxed is the lesser of 1) 50 percent of the benefits; or 2)
50 percent of the excess of the combined income over the threshold. If the combined
income is greater than the threshold, the amount taxed is the lesser of 1) amount calculated
above plus 85 percent of the excess of the combined income over the threshold; or 2) 85
percent of the benefits. Thus, 85 percent of the benefits is the maximum amount of benefits
that may be included in gross income.
MCQ-12521
Passive activity losses of an individual taxpayer can generally be used to offset:
1. Interest income on U.S. Treasury notes.
2. A guaranteed payment received from a partnership.
3. Dividend income from a foreign corporation.
4. Income from the rental of a residence
Explanation
Choice “4” is correct. Passive activity losses (PALs) can only be offset against passive activity income, not active or portfolio income. Passive activities are trade or business activities in which the taxpayer does not materially participate. Rental real estate is a passive activity unless the taxpayer is a real estate professional.
Choice “1” is incorrect. Interest income from U.S. Treasury notes is taxable portfolio income. PALs can only offset passive activity income.
Choice “2” is incorrect. A guaranteed payment from a partnership is taxable active income. PALs can only offset passive activity income.
Choice “3” is incorrect. Dividend income from a foreign corporation is taxable portfolio income. PALs can only offset passive activity income.
MCQ-14928 A taxpayer employed full time as an engineer has the following income items: Self-employment income $50,000 Rental income 15,000 Dividend income 2,000 Long-term capital gain 1,500 Short-term capital loss 1,000 What amount is the taxpayer's passive income? 1. $15,000 2. $17,500 3. $2,500 4. $18,500
Explanation
Choice “1” is correct. The rental income of $15,000 is automatically passive unless an exception applies (mom-and-pop exception or real estate professional). The self-employment income is active income. The dividend income, long-term capital gain (LTCG), and short-term capital loss (STCL) are portfolio income.
Choice “2” is incorrect. $17,500 includes the total portfolio income of $2,500 and the rental income of $15,000. Only the $15,000 rental income is passive income.
Choice “3” is incorrect. $2,500 is the amount of portfolio income ($2,000 dividend income +
$1,500 LTCG − $1,000 STCL).
Choice “4” is incorrect. $18,500 includes the $15,000 rental income, $2,000 dividend income, and $2,500 LTCG. Only the $15,000 rental income is passive income. The dividend income and LTCG are portfolio income.
MCQ-14699 Calculate the taxpayer's qualified business income deduction for a specified service trade or business: Filing status: Single Taxable income: $300,000 Net capital gains: $0 Qualified business income (QBI): $50,000 W-2 wages: $10,000 1. $60,000 2. $15,000 3. $5,000 4. $0
Explanation
Choice “4” is correct. A taxpayer with taxable income before the QBI deduction of $214,900 or more (2021) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).
Choice “1” is incorrect. This amount is 20% of taxable income: $300,000 × 20% = $60,000. A taxpayer with taxable income before the QBI deduction of $214,900 or more (2021) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).
Choice “2” is incorrect. A taxpayer with taxable income before the QBI deduction of $214,900 or more (2021) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).
Choice “3” is incorrect. This amount is 50% of the W-2 wages: $10,000 × 50% = $5,000. A taxpayer with taxable income before the QBI deduction of $214,900 or more (2021) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB). The W-2 wage limitation does not apply
MCQ-14929
A taxpayer reported the following in a tax year:
Salary $122,000
Capital gain dividends 3,700
Partnership short-term capital loss (6,300)
The taxpayer acquired the partnership interest during the year in exchange for a capital
contribution of $2,750, and there were no additional items affecting the taxpayer’s basis in
the partnership. What is the taxpayer’s adjusted gross income for the year?
1. $122,700
2. $122,950
3. $122,000
4. $119,400
Explanation
Choice “2” is correct. The taxpayer’s adjusted gross income (AGI) for the year is $122,950. The short-term capital loss (STCL) from the partnership can only be flowed through for
deduction on the partner’s individual income tax return to the extent of the partner’s tax basis in the partnership interest. In this case, the partner’s basis is the amount of his capital
contribution of $2,750, so only $2,750 of the STCL is flowed through for deduction on his individual tax return. The remaining $3,550 loss ($6,300 − $2,750) is suspended until the partner’s basis is reinstated in future years. Individual taxpayers are allowed to deduct up to $3,000 of net capital losses each year, after netting all the capital gains and losses for the year together. The $2,750 STCL from the partnership is offset against the LTCG dividends of $3,700, so the taxpayer has a net LTCG for the year of $950.
Salary $122,000
Capital gain dividends (LTCG) $3,700
STCL from partnership (2,750)
Net LTCG 950
AGI 122,950
Choice “1” is incorrect. AGI of $122,700 includes a $3,000 deduction for the STCL from the partnership ($122,000 + $3,700 − $3,000). The STCL flowed through from the partnership is limited to the taxpayer’s basis in the partnership of $2,750. Even if the STCL flowed through from the partnership was more than $3,000, the $3,000 capital loss deduction is for
net capital losses, after netting all capital gains and losses together.
Choice “3” is incorrect. AGI of $122,000 only includes the salary, not the capital gain dividends or the STCL from the partnership.
Choice “4” is incorrect. AGI of $119,400 incorrectly deducts all $6,300 of the STCL from the
partnership.
MCQ-08213 Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income? 1. $40,000 2. $20,000 3. $15,000 4. $0
Explanation
Choice “3” is correct. Generally, none of the passive losses from real estate are deductible against nonpassive income. However, Smith actively participates, which means that the “mom and pop” exception of up to $25,000 will apply. This exception is phased out over AGI of $100,000 through $150,000. That is 50 cents on the dollar. Smith’s AGI is $120,000. That is $20,000 into the phaseout range. So $10,000 of the $25,000 is phased out and Smith may deduct $15,000 of the $40,000 passive loss.
Choices “4”, “2”, and “1” are incorrect per the above explanation.
MCQ-08192 Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson's salary. Assume the annual IRS established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income? 1. $100,552 2. $100,000 3. $100,276 4. $100,414
Explanation
Choice “4” is correct. The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts exceeding this are taxable based on IRS tables. The total group term life insurance here is $200,000 (twice the salary of $100,000). The amount exceeding $50,000 is $150,000. The cost given here is $2.76 per $1,000 of insurance. 150 × $2.76 = $414. So the total amount included in gross income is $100,414 ($100,000 + $414).
Choice “1” is incorrect. $100,552 includes the entire $200,000 of the group term life insurance instead of only $150,000.
Choice “2” is incorrect. $100,000 does not include any of the taxable amount of group term life insurance.
Choice “3” is incorrect. $100,276 only includes $100,000 of the group term life insurance
instead of $150,000.
MCQ-01614 Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, Year 8. On January 2, Year 2, Mott paid $30,000 as consideration for canceling the lease. On November 1, Year 2, Nare leased the building to Pine under a five-year lease. Pine paid Nare $10,000 rent for the two months of November and December, and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its Year 2 income tax return? 1. $40,000 2. $45,000 3. $15,000 4. $10,000
Explanation
Choice “2” is correct. Prepaid rent is income when received even for an accrual-basis taxpayer. The $30,000 received as consideration for canceling the lease is in substitution for rental payments and is thus rental income. The $5,000 prepaid for the last month’s rent is also rental income.
Choice “1” is incorrect. The $5,000 prepaid for the last month’s rent would also be rental income.
Choice “3” is incorrect. The $30,000 is in substitution of rental payments and is thus rental income.
Choice “4” is incorrect. The $30,000 received as consideration for canceling the lease is in
substitution for rental payments and is thus rental income. The $5,000 prepaid for the last
month’s rent is also rental income.
MCQ-01620 John and Mary were divorced in 2017. The divorce decree (executed June 30, 2017) provides that John pay alimony of $10,000 per year, to be reduced by 20 percent on their child's 18th birthday. During the current year, the $10,000 was paid in the following way: John paid $7,000 directly to Mary and $3,000 to Spring College for Mary's tuition. What amount of these payments should be reported as income in Mary's current year income tax return? 1. $8,000 2. $5,600 3. $8,600 4. $10,000
Explanation
Choice “1” is correct. Alimony paid pursuant to a divorce or separation agreement executed before December 31, 2018 would be income to Mary while child support would not. Funds qualify as child support only if 1) a specific amount is fixed or is contingent on the child’s status (e.g., reaching a certain age); 2) it is paid solely for the support of minor children; and
3) it is payable by decree, instrument, or agreement. The actual use of the funds is irrelevant to the issue. In this case, $2,000 (20% × $10,000) qualifies as child support. The other $8,000 is alimony, which would be income to Mary. Note that for all divorce or separation agreements executed after December 31, 2018, the alimony is neither taxable to the recipient nor deductible by the payor.
Choice “2” is incorrect. Take 80% of the $10,000 paid, not 80% of the $7,000 received by Mary.
Choice “3” is incorrect. Only $8,000 would be alimony per the divorce decree (80% × $10,000).
Choice “4” is incorrect. The 20% reduction when the child turns 18 makes 20% of the $10,000 payment, or $2,000, child support, which is nontaxable to Mary
