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AC553 - Week 3 - differently under each classification on...

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AC553 Week 3 Yazan Herbawi Chapter 7 Question 7: Active income is income derived from the main course of business or trade, i.e. the taxpayer’s full-time job or main means of generating income. Passive income on the other hand, is income derived from passive activities, i.e., activities that the taxpayer does not devote sufficient time for to be considered as part of main trade and business activities. Portfolio income comes from dividends, annuities, and other investments not part of main course of business activities. Question 13: Material participation is a concept used by the law to determine what qualifies as a passive activity. A passive activity is defined as any business or trade activity that the taxpayer does not materially participate in running. Therefore, material participation as a concept helped sooth the difficulty in dealing with such a subjective issue. It is important to distinguish passive income from active income, since losses are treated
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Unformatted text preview: differently under each classification on the taxpayer’s tax return. Problem 46: Beth is a full-time CPA, devoting 3,000. In this case, all income derived from rental activities is considered passive regardless of the owner’s level of participation. Beth is allowed to offset this passive loss against passive gains only, unless her value at-risk is affected. Once all passive gains are offset to losses, any additional loss can be deducted, but also reducing her value at-risk. Chapter 8 Problem 40: a. Charlie is allowed to deduct the fair market value of the asset contributed, which is $800. b. If the private charity qualifies as one of the recognized charities under law, Durwood would be allowed to deduct the fair value of the stock, which is $7,000. c. The deduction allowed in this case is also the fair market value of the asset, $10,000....
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