· Qualifying individuals may deduct up to $25,000 of losses from real estate rental activities
against active and portfolio income. The potential annual $25,000 deduction is reduced by
50 percent of the taxpayer’s AGI in excess of $100,000.
100.When a taxpayer disposes of a passive activity by gift, what happens to any unused passive losses?
ANSWER: In a disposition of a taxpayer’s interest in a passive activity by gift, the suspended losses are
added to the basis of the property.
101.Describe the general rules that limit the deduction of investment interest expense.
ANSWER: The deduction of investment interest expense is limited to net investment income for the
year. Any investment interest expense not deducted in the current year is carried over for
potential use in succeeding years.
Investment interest expense is interest incurred on borrowed funds used to acquire or
continue to hold investment assets. Net investment income is investment income (e.g.,
interest, annuities, royalties) reduced by investment expenses (i.e., deductible expenses
directly connected to the production of investment income).
102.Identify the types of income that are classified as investment income. Discuss the flexibility that a
taxpayer has with respect to certain types of income that may potentially be considered investment
income.
ANSWER: Investment income is gross income from interest, dividends (in certain cases), annuities, and
royalties not derived in the ordinary course of a trade or business. Passive activity income
and income from a real estate activity in which the taxpayer actively participates are not
included as investment income.
The taxpayer may elect to treat net capital gain and qualified dividends as investment income.
Net capital gain includes gain attributable to the dispositions of property producing
investment income or held for investment purposes. Qualified dividends are dividends that
are taxed at the same marginal rate that is applicable to a net capital gain. If the taxpayer
elects to treat net capital gain and qualified dividend income as investment income, they may
not be taxed using the preferential capital gains rates.
CHAPTER 13: TAX CREDITS AND
PAYMENT PROCEDURES
195
, 1. The tax benefit received from a tax credit is never affected by the tax rate of the taxpayer.
a. True
b. False
ANSWER: True
RATIONALE: The tax benefit from a tax credit is not affected by the tax rate of the taxpayer.
2. The tax benefits resulting from tax credits and tax deductions are affected by the tax rate bracket of the
taxpayer.
a. True
b. False
ANSWER: False
RATIONALE: While the statement is true for a tax deduction, it is false for tax credits (the tax benefit of a tax
credit is not affected by the tax rate bracket of the taxpayer).
3. Nonrefundable credits are those that reduce the taxpayer’s tax liability but are not paid when the
amount of the credit (or credits) exceeds the taxpayer’s tax liability.
a. True
b. False
ANSWER: True
RATIONALE: Most credits are not refundable.
4. The credit for child and dependent care expenses is an example of a refundable credit.
a. True
b. False
ANSWER: False
RATIONALE: The credit for child and dependent care expenses is a nonrefundable credit.
196
, 5. Any unused general business credit must be carried back 3 years and then forward for 20 years.
a. True
b. False
ANSWER: False
RATIONALE: Unused general business credits are carried back one year. Any remaining credits are then
carried forward for 20 years.
6. A LIFO method is applied to general business credit carryovers, carrybacks, and utilization of credits
earned during a particular year.
a. True
b. False
ANSWER: False
RATIONALE: The FIFO method is used.
7. The purpose of the tax credit for rehabilitation expenditures is to encourage the relocation of businesses
from older, economically distressed areas (i.e., inner city) to newer locations.
a. True
b. False
ANSWER: False
RATIONALE: The purpose is to discourage, not encourage, relocation of businesses.
8. Qualified rehabilitation expenditures include the cost of acquiring the building, but not the cost of
acquiring the land.
a. True
b. False
ANSWER: False
197
, RATIONALE: The acquisition costs of a building and of land are not qualified rehabilitation expenditures.
9. The tax credit for rehabilitation expenditures for certified historic structures differs from that for
qualifying structures that are not certified historic structures.
a. True
b. False
ANSWER: True
RATIONALE: The rate is 20% for certified historic structures and 10% for qualifying structures that are not
certified historic structures.
10.Some (or all) of the tax credit for rehabilitation expenditures will have to be recaptured if the
rehabilitated property is disposed of prematurely or if it ceases to be qualifying property.
a. True
b. False
ANSWER: True
11.If a taxpayer is required to recapture any tax credit for rehabilitation expenditures, the recapture
amount need not be added to the adjusted basis of the rehabilitation expenditures.
a. True
b. False
ANSWER: False
RATIONALE: The recapture amount must be added to the adjusted basis of the rehabilitation expenditures.
12.The purpose of the work opportunity tax credit is to encourage employers to hire individuals from
specified target groups traditionally subject to high rates of unemployment.
a. True
b. False
ANSWER: True
198
against active and portfolio income. The potential annual $25,000 deduction is reduced by
50 percent of the taxpayer’s AGI in excess of $100,000.
100.When a taxpayer disposes of a passive activity by gift, what happens to any unused passive losses?
ANSWER: In a disposition of a taxpayer’s interest in a passive activity by gift, the suspended losses are
added to the basis of the property.
101.Describe the general rules that limit the deduction of investment interest expense.
ANSWER: The deduction of investment interest expense is limited to net investment income for the
year. Any investment interest expense not deducted in the current year is carried over for
potential use in succeeding years.
Investment interest expense is interest incurred on borrowed funds used to acquire or
continue to hold investment assets. Net investment income is investment income (e.g.,
interest, annuities, royalties) reduced by investment expenses (i.e., deductible expenses
directly connected to the production of investment income).
102.Identify the types of income that are classified as investment income. Discuss the flexibility that a
taxpayer has with respect to certain types of income that may potentially be considered investment
income.
ANSWER: Investment income is gross income from interest, dividends (in certain cases), annuities, and
royalties not derived in the ordinary course of a trade or business. Passive activity income
and income from a real estate activity in which the taxpayer actively participates are not
included as investment income.
The taxpayer may elect to treat net capital gain and qualified dividends as investment income.
Net capital gain includes gain attributable to the dispositions of property producing
investment income or held for investment purposes. Qualified dividends are dividends that
are taxed at the same marginal rate that is applicable to a net capital gain. If the taxpayer
elects to treat net capital gain and qualified dividend income as investment income, they may
not be taxed using the preferential capital gains rates.
CHAPTER 13: TAX CREDITS AND
PAYMENT PROCEDURES
195
, 1. The tax benefit received from a tax credit is never affected by the tax rate of the taxpayer.
a. True
b. False
ANSWER: True
RATIONALE: The tax benefit from a tax credit is not affected by the tax rate of the taxpayer.
2. The tax benefits resulting from tax credits and tax deductions are affected by the tax rate bracket of the
taxpayer.
a. True
b. False
ANSWER: False
RATIONALE: While the statement is true for a tax deduction, it is false for tax credits (the tax benefit of a tax
credit is not affected by the tax rate bracket of the taxpayer).
3. Nonrefundable credits are those that reduce the taxpayer’s tax liability but are not paid when the
amount of the credit (or credits) exceeds the taxpayer’s tax liability.
a. True
b. False
ANSWER: True
RATIONALE: Most credits are not refundable.
4. The credit for child and dependent care expenses is an example of a refundable credit.
a. True
b. False
ANSWER: False
RATIONALE: The credit for child and dependent care expenses is a nonrefundable credit.
196
, 5. Any unused general business credit must be carried back 3 years and then forward for 20 years.
a. True
b. False
ANSWER: False
RATIONALE: Unused general business credits are carried back one year. Any remaining credits are then
carried forward for 20 years.
6. A LIFO method is applied to general business credit carryovers, carrybacks, and utilization of credits
earned during a particular year.
a. True
b. False
ANSWER: False
RATIONALE: The FIFO method is used.
7. The purpose of the tax credit for rehabilitation expenditures is to encourage the relocation of businesses
from older, economically distressed areas (i.e., inner city) to newer locations.
a. True
b. False
ANSWER: False
RATIONALE: The purpose is to discourage, not encourage, relocation of businesses.
8. Qualified rehabilitation expenditures include the cost of acquiring the building, but not the cost of
acquiring the land.
a. True
b. False
ANSWER: False
197
, RATIONALE: The acquisition costs of a building and of land are not qualified rehabilitation expenditures.
9. The tax credit for rehabilitation expenditures for certified historic structures differs from that for
qualifying structures that are not certified historic structures.
a. True
b. False
ANSWER: True
RATIONALE: The rate is 20% for certified historic structures and 10% for qualifying structures that are not
certified historic structures.
10.Some (or all) of the tax credit for rehabilitation expenditures will have to be recaptured if the
rehabilitated property is disposed of prematurely or if it ceases to be qualifying property.
a. True
b. False
ANSWER: True
11.If a taxpayer is required to recapture any tax credit for rehabilitation expenditures, the recapture
amount need not be added to the adjusted basis of the rehabilitation expenditures.
a. True
b. False
ANSWER: False
RATIONALE: The recapture amount must be added to the adjusted basis of the rehabilitation expenditures.
12.The purpose of the work opportunity tax credit is to encourage employers to hire individuals from
specified target groups traditionally subject to high rates of unemployment.
a. True
b. False
ANSWER: True
198
