Y08Acct411ch7hw - Chapter 7 homework 3. Generally,...

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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 Generally, taxpayers are at risk for amounts contributed, for income realized from an activity and not withdrawn, and for liabilities associated with an activity for which the taxpayer is personally responsible.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 and basis. 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. Generally, passive 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. For 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. 13. 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 investor. 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
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This note was uploaded on 04/08/2008 for the course ACCT 411 taught by Professor Brennen during the Spring '08 term at Minnesota State University, Mankato.

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Y08Acct411ch7hw - Chapter 7 homework 3. Generally,...

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