7090885-Solutions - CHAPTER 11 Passive Activity Losses...

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CHAPTER 11 Passive Activity Losses 11-5 DISCUSSION QUESTIONS 1. Congress enacted the at-risk provisions in 1976. The at-risk rule limits tax deductions from an investment to the amount the taxpayer stands to lose in the event of financial disaster. In 1986, Congress enacted the passive loss provisions, which prohibit specified taxpayers from offsetting passive losses against active and portfolio income. pp. 11-2 and 11-3 2. Alice is at-risk for the $100,000 of cash invested plus her $50,000 share of the recourse debt. Thus, her at-risk amount is $150,000. p. 11-4 3. A taxpayer’s at-risk amount is increased by the following items: The amount of cash and the adjusted basis of property contributed to the activity. Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity. Taxpayer’s share of amounts borrowed for use in the activity that is qualified nonrecourse financing. Taxpayer’s share of the activity’s income. A taxpayer’s at-risk amount is decreased by the following items: The amount of cash and the adjusted basis of property withdrawn from the activity (i.e., withdrawals). The taxpayer’s share of losses from the activity. Reductions of amounts borrowed for use in the activity for which the taxpayer is personally liable or reductions in qualified nonrecourse debt. If a taxpayer is facing disallowances of deductions because of the at-risk limitation, it is possible to increase the amount at-risk by investing additional funds or property or having the business increase recourse or qualified nonrecourse debt. pp. 11-4, 11-5, and Concept Summary 11-1 4. James can deduct only $10,000 currently because that is all he has at risk. Assuming further he is not a material participant, this deduction will be suspended under the passive loss rules if he does not have passive income from other investments of at least $10,000. If, in the future, his at-risk amount increases sufficiently, he will then be able to deduct the remainder (i.e., $8,000), again subject to the passive activity limitations. pp. 11-4, 11-5, and 11-20 5. Active income includes the following: Wages, salary, commissions, bonuses, and other payments for services rendered by the taxpayer. Profit from a trade or business in which the taxpayer is a material participant. Gain on the sale or other disposition of assets used in an active trade or business.
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11-6 2006 Comprehensive Volume/Solutions Income from intangible property if the taxpayer’s personal efforts significantly contributed to the creation of the property. Portfolio income includes the following: Interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Gain or loss from the disposition of property that produces portfolio income or is
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This note was uploaded on 03/08/2010 for the course ACCT 3500 taught by Professor Smith during the Spring '10 term at Kwantlen Polytechnic University.

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7090885-Solutions - CHAPTER 11 Passive Activity Losses...

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