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Exam 6: Losses and Loss Limitations

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Question 71

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Jackson Company incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Jackson is a personal service corporation,it may deduct $34,000 of the passive loss.

A) True
B) False

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Question 72

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Two years ago,Gina loaned Tom $50,000.Tom signed a note the terms of which called for monthly payments of $2,000 plus 6% interest on the outstanding balance.Last year,when the balance owing on the loan was $18,000,Tom defaulted on the note.As of the end of last year,there appeared to be no reasonable prospect of Gina recovering the $18,000.As a consequence,Gina claimed the $18,000 as a nonbusiness bad debt.Last year,Gina had AGI of a negative $6,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends.Gina did not itemize her deductions.During the current year,Tom paid Gina $13,000 in final settlement of the loan.How should Gina account for the payment in the current year?

A) File an amended tax return for last year.
B) Report no income for the current year.
C) Report $8,000 of income for the current year.
D) Report $12,000 of income for the current year.
E) None of the above.

F) B) and D)
G) A) and E)

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Question 73

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Discuss the treatment given to suspended passive activity losses and credits.What happens to an activity's unused losses and credits when the activity is sold?

From January through November,Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest.The partnership has four full-time employees.During December,Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards.Vern qualifies as a material participant.

Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective,Linda will be better off if Activity A is not passive.

In 2014,Kelly earns a salary of $200,000 and invests $40,000 for a 20% interest in a partnership not subject to the passive loss rules.Through the use of $800,000 of nonrecourse financing,the partnership acquires assets worth $1 million.The activity produces a loss of $150,000,of which Kelly's share is $30,000.In 2015,Kelly's share of the loss from the partnership is $15,000.How much of the loss from the partnership can Kelly deduct?

In 2015,Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant.The partnership incurs a loss with $100,000 being Arnold's share.Which of the following statements is incorrect?

A theft loss is taken in the year of the theft.

Dena owns interests in five businesses and has full-time employees in each business.She participates for 100 hours in Activity A,120 hours in Activity B,130 hours in Activity C,140 hours in Activity D,and 125 hours in Activity E.

Joyce owns an activity (not real estate)in which she participates for 100 hours a year;her husband participates for 450 hours.Joyce qualifies as a material participant.