Chapter 7 Homework

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School

Saint Mary's University *

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450

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Finance

Date

Apr 3, 2024

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docx

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Uploaded by MasterStingray4058

Chapter 7 Homework 1.) What is a tax shelter? Generally, what two limitations apply to the deductibility of most tax shelter loss deduction? A Tax Shelter is an activity providing deductions and/or credits to an investor which will reduce tax liability with respect to income from other sources. Two limitations apply to the deductibility of most tax shelter loss deduction are: o All limited partnership investment, rental properties, and business in which an owner does not materially participate have been affected. o Losses arising from passive activity are not deductible, except against income from a passive activity. 3.) Generally, what is “at-risk”? The “at-risk” rule disallows losses that are more than an investor’s amount at risk. Generally, is the amount of investment that an investor could possibly lose. 4.) What is a nonrecourse loan? Will a nonrecourse loan given by the seller of real estate to the buyer increase the amount the buyer has at risk? Explain. A nonrecourse loan is a loan that is secured by the property purchased, rather than the personal assets of the borrower. The amount the buyer has at risk it will increase the at-risk basis because those loans are secured by the property itself, and the buyer is not personally responsible for repayment. 5.) What is the general rule from the deductibility of passive income? Once the at-risk rules are satisfied, a passive loss can then be used in the following ways: offset passive income, offset other income (under certain conditions), and/or become suspended. 7.) Differentiate between the following: active income, passive income, and portfolio. The differentiations between active income, passive income and portfolio are: o Active Income comes from salary, commissions, wages etc. o Passive Income is derived from passive activities. o Portfolio is Interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business.

9.) What is a “suspended loss”? How can suspended losses offset nonpassive income? Suspended loss is any loss or credit from a passive activity which disallowed by the passive loss rule is treated as a deduction or credit allocable to such activity in the next taxable year. Suspended losses offset nonpassive income if the current tax year of nonpassive income triggers the deductibility of prior year suspended passive activity losses, those losses can be used to offset the current tax year income from the same activity. 13.) Briefly, what is “material participation”? Why is the determination of whether a taxpayer materially participates important? Material participation is a requirement for the taxpayer to be involved in the operations of the activity on a regular, continuous, and substantial basis. Material participation is important because it devised to include virtually all “passive” business owners but at the same time exclude certain “active” business owners from being brought into the passive loss arena. 21.) What relief from passive loss restrictions is provided to help taxpayers deduct losses from rental real estate activities? What are the qualifications? Relief from passive loss restrictions are a $25k deduction for active participants, for individuals who actively participate in rental estate activities and whose AGI is less than $150k or $75k for MFS. The qualifications are that the taxpayers must qualify as a real estate professional and materially participate in the rental activity, more than half of the personal service performed were related to a real property trade or business and the taxpayer spent more than 750 hours during the tax year working in a real property trade or business. 22.) What is “active participation”? Active participation is when a taxpayer is actively involved and make meaningful contributions such as making managements decisions. 28.) What carryforward procedures applies to business net operating losses? A business incurring a net operating loss in a taxable year can carry the loss forward indefinitely. 29.) What qualifications must be met before a taxpayer is allowed a home office deduction? Qualification for the taxpayer to be allowed a home office deductions are that is the principal place of business for any trade or business of the taxpayer, a place of business which is used by patients, clients, or customers in meeting or

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