For a passive activity, how many hours must be worked to be considered a Material Participant?
>500 hours/year
True / False: Income attributed to a limited partner is considered passive activity income.
True
What three factors limit losses that can be taken as a deduction on taxes?
MUST BE CONSIDERED IN THIS ORDER. IF THE AMOUNT PASSES THE FIRST TEST, IT MUST THEN PASS THE 2ND (3rd) TEST BEFORE BEING DEDUCTIBLE
(1) The tax basis
(2) The at-risk basis
(3) Passive loss limitations
A taxpayer’s losses in a Sched C business exceed his basis amount. How is the excess loss handled?
The loss is carried forward indefinitely until more basis is generated. The loss must then survive the at-risk and passive loss limitations before it is deductible.
A taxpayer’s losses in a Sched C business exceed his basis amount and he sells his interest in the business. How are losses handled for tax purposes?
The losses cannot be deducted because the taxpayer has already received all of the amounts he has put into the business. These losses are forfeit.
A taxpayer’s losses in a Sched C business are less than his basis, but more than his at-risk amount. How is the excess loss handled?
The excess loss is carried forward indefinitely until more at-risk amounts are available.
A taxpayer’s losses in a Sched C business are less than his basis amount but more than his at-risk amount and the taxpayer sells his interest in the business. How are losses handled for tax purposes?
The losses can be used to offset the gain from the sale of the activity.
True / False: Passive activity losses can be used to offset ordinary income.
False
What are the 3 ways that passive activity losses are handled for tax purposes?
(1) offset passive activity gains
(2) fully deductible in the year the property is sold
(3) IF the taxpayer becomes a material participant (switch from passive to active), the unused passive losses now offset the taxpayer’s active income in the same activity.
Which types of business arrangements are subject to the passive activity loss rules?
Individuals
Estates
Trusts
Personal Service Corps
Closely Held C-Corps
What are the two conditions that allow passive activity loss deduction without waiting until the passive activity is sold?
(1) Mom and Pop Exception: If the taxpayer owns at least 10% of the rental activity AND actively manages the property, the Mom & Pop may deduct up to $25,000 annually. Reduce by $0.50 for every $1 over $100,000 AGI OR
(2) Real Estate Person: Your job consists of >50% of your time and >750 hrs/yr are performed in rental real property businesses, then you are active (not passive) and losses can be deducted against other active income.
What is the limitation on net capital losses for the year? Is there carryback or carryforward?
$3,000
Excess losses carryforward indefinitely and retain either their short- or long-term status.
