Federal Taxation Chapter 11 Practice Questions with Complete Solutions Rated A+ (100% Correct)
what happens if passive losses exceed passive income - Answers the excess losses are suspended and
carried forward to the next year
for tax planning can you use passive losses to offset active income - Answers no
when receiving a passive activity gift with inherited suspended losses, what is the procedure - Answers
to use those inherited losses to offset future passive income up to the loss amount
what is deductibility of investment interest limited to - Answers it is limited to the amount of net
investment income
what threshold makes an activity a 'significant activity' - Answers 100 hours
At risk limitation example - Answers Now consider a more complex situation, where there is debt
involved and the investor is not personally liable for it:
Sally invests $100,000 in a partnership. However, the partnership borrows $200,000 from a bank, and
Sally is not personally liable for the loan.
Sally's initial at-risk amount is $100,000, since she is only at risk for the amount of her own investment,
not the loan the partnership took out.
The partnership incurs a loss of $150,000 in a year.
Since Sally's at-risk amount is only $100,000, she can only deduct $100,000 of the loss.
The remaining $50,000 of the loss is carried forward to future years, to be deducted when Sally has
more at-risk capital (such as additional contributions or if the partnership generates income).
recourse vs nonrecourse debt - Answers recourse debt means you are personally liable and need to
count the amount towards your at risk amount
decreases to tax payer at-risk amount - Answers - Withdrawals from the activity.
- Taxpayer's share of the activity's deductible loss.
what happens if passive losses exceed passive income - Answers the excess losses are suspended and
carried forward to the next year
for tax planning can you use passive losses to offset active income - Answers no
when receiving a passive activity gift with inherited suspended losses, what is the procedure - Answers
to use those inherited losses to offset future passive income up to the loss amount
what is deductibility of investment interest limited to - Answers it is limited to the amount of net
investment income
what threshold makes an activity a 'significant activity' - Answers 100 hours
At risk limitation example - Answers Now consider a more complex situation, where there is debt
involved and the investor is not personally liable for it:
Sally invests $100,000 in a partnership. However, the partnership borrows $200,000 from a bank, and
Sally is not personally liable for the loan.
Sally's initial at-risk amount is $100,000, since she is only at risk for the amount of her own investment,
not the loan the partnership took out.
The partnership incurs a loss of $150,000 in a year.
Since Sally's at-risk amount is only $100,000, she can only deduct $100,000 of the loss.
The remaining $50,000 of the loss is carried forward to future years, to be deducted when Sally has
more at-risk capital (such as additional contributions or if the partnership generates income).
recourse vs nonrecourse debt - Answers recourse debt means you are personally liable and need to
count the amount towards your at risk amount
decreases to tax payer at-risk amount - Answers - Withdrawals from the activity.
- Taxpayer's share of the activity's deductible loss.
