CPA Regulation (REG) : Passive Income & Losses
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Example Questions
Example Question #1 : Individual Income Tax Sources Of Taxable Income
Passive activity losses of an individual taxpayer can generally be used to offset
Income from the rental of a residence.
A guaranteed payment received from a partnership.
Dividends income from a foreign corporation.
Interest income on U.S. Treasury notes.
Income from the rental of a residence.
Income from the rental of residence is considered passive activity, and as such passive activity losses may be taken up to the extent of passive activity gains. None of the other items are regarded as passive activity income: guaranteed payments are treated as ordinary income; dividends and interest are treated as portfolio income (a distinct category from passive income).
Example Question #2 : Individual Income Tax Sources Of Taxable Income
A partner in a real estate partnership had a basis of $5,000 at the beginning of the year and a basis of $10,000 at year end. The partner's at-risk amount at year end was $8,000. The partner's Form K-1 listed $12,000 as the partner's share of the partnership's ordinary loss. What amount can the partner deduct on the partner's tax return?
$8,000
$10,000
$5,000
$12,000
$8,000
For flow-through entities issuing Schedule K-1 to its partners, an individual partner’s loss limitation cannot exceed the at-risk amount. Any excess loss may be carried forward by the partner indefinitely. Since this partner’s at-risk amount is $8,000, the deducted loss cannot exceed $8,000
Example Question #1 : Individual Income Tax Sources Of Taxable Income
Alan created a trust for the benefit of his son, George. Alan does not have the right to change any terms of the trust once established and has no right to income. All trust income is to be distributed to George on an annual basis. How should the trust income be reported?
Reported on Form 1041, with a Schedule K-1 issued to George.
Reported on Form 1041, with a Schedule K-1 issued to Alan.
To George, reported only on his Form 1040.
To Alan, reported only on his Form 1040.
Reported on Form 1041, with a Schedule K-1 issued to George.
For estates and trusts, only income to beneficiaries is report on Form 1041 and Schedule K-1. Since George is the beneficiary, he is the recipient of the Schedule K-1, not his father.
Example Question #1 : Individual Income Tax Sources Of Taxable Income
A and B are equal members in AB LLC which has not elected to be treated as a corporation. A contributes cash of $7,000 and B contributes a machine with an adjusted basis of $5,000 and FMV of $10,000, subject to a liability of $3,000. What is B’s basis in AB LLC?
$10,000
$5,000
$3,500
$2,000
$3,500
The LLC has not elected to be treated as a corporation. Therefore, it will be treated as a partnership. B’s basis will be the adjusted basis of the contributed property minus 50% of the liability which is assumed by the other partner. $5,000 - $1,500 = $3,500.
Example Question #1 : Passive Income & Losses
ABC Inc is an S corporation that pays single coverage health insurance premiums of $4,8000 per year and family coverage premiums of $7,200 per year. A is a 10% shareholder in the S corp. On A’s behalf, ABC pays A’s family coverage under the health insurance plan. What amount of insurance premiums is includable in A’s gross income?
$0
$720
$7,200
$4,800
$7,200
Fringe benefits paid by an S corp are deductible by the S corp only for non-shareholder employees and those employee-shareholders owning 2% or less of the S corp.
Example Question #2 : Passive Income & Losses
In a complete liquidation of a partnership, a partner would recognize a gain:
Only if that partner had been a partner since formation
Only to the extent that money received exceeds the partner’s adjusted basis
Only if that partner had a majority interest
No matter what
Only to the extent that money received exceeds the partner’s adjusted basis
The partner would likely not recognize a gain or loss in complete liquidation unless the money received exceeds the partner’s basis.
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