Chapter 7 homework
3. Generally, taxpayers are at risk for amounts contributed, for income realized from
an activity and not withdrawn, and for liabilities associated with an activity for which
the taxpayer is personally responsible.
All of these amounts can be decreased, too
(withdrawals, losses, and relinquishment of liabilities).
The amount “at risk” is very
similar to the amount of “basis” in an investment but the amount “at risk” in general
does not include nonrecourse loans (although the tax law makes significant
exceptions to this rule by allowing many nonrecourse loans obtained in a business
setting (usually ones secured by business property) to count for both amounts at risk
4. A nonrecourse loan is one where the buyer is not personally responsible to satisfy
the loan in case of default.
In general, most nonrecourse loans in commercial
settings are secured by the property financed by the loan.
In such a case, the lender
would be limited to taking the property to satisfy the debt.
A nonrecourse loan given
by the seller of the property is not a “qualified” nonrecourse loan so the loan does
not increase the buyer’s amount at risk.
7. Active income is income derived from the direct efforts of the individual, such as
wages, salaries, commissions, tips, and a trade or business in which the individual
does materially participate. Passive income is income from trade or business in which
the taxpayer does not materially participate and rental income.
activities are held in the sole proprietorship or pass-through form. Portfolio income is
income from stocks, bonds, annuities, and royalties not derived in the ordinary
course of a business. Dividends, interest, and gains from the sale of investments
producing these are portfolio income.
9. A suspended passive loss is one that is not able to be used by the taxpayer.
example, if a taxpayer has $3,000 of passive income and $4,000 of passive loss, the
taxpayer would have $1,000 of suspended loss.
Suspended losses from a particular
passive activity can be used to offset nonpassive income when the taxpayer disposes
of the activity.
The term “material participation” applies to trade or business activities.
Basically, material participation means that the taxpayer works in the activity enough
(or has worked enough in the past) that the taxpayer is not considered a mere
There are a number of ways to meet the material participation standard
and they are listed in your text.
21. A $25,000 offset (meaning UP TO THAT AMOUNT of loss may be deducted against
nonpassive income) is provided taxpayers who rent real estate, who actively
participate, and whose modified AGIs are $100,000 or less. There is a phaseout of the
$25,000 offset for modified AGIs greater than $100,000 at the rate of $.50 on the