ACCT 401 - Chapter 7

The operating loss from a passive activity can NOT be used to offset which categories of income?

Active business and portfolio income

Darin is a 25% owner in a partnership in which he has a tax basis of $7,000 and an at-risk basis of $5,000. Darin materially participates in the operations of the partnership which incurred a loss of $40,000 in the current year. Based on these facts, ______.

$10,000 of the loss will flow-through to Darin, and he will be able to deduct $5,000.

Darlene is a 50% owner in a partnership in which she has a tax basis and at-risk basis of $10,000. Darlene materially participates in the operations of the partnership which incurred a loss of $35,000 in the current year. Based on these facts, ______.

$17,500 of the loss will flow-through to Darlene, and she will be able to deduct $10,000.

What is the rate of the additional tax that is assessed on net investment income when it exceeds specified thresholds?

3.8%

In order for a taxpayer to be able to deduct the loss on a business activity in which she is an owner, she must demonstrate that she in the conduct of the business. If she does NOT, the activity is considered to be a passive activity.

Blank 1: materially Blank 2: participates, participated, or participate

When a taxpayer does NOT materially participate in the business activities of a trade or business (including rental activities) in which he is a partial owner, any loss that flows through to the taxpayer is subject to the loss rules.

Blank 1: passive Blank 2: activity

Passive activity losses may only offset income, but NOT active business or income.

Blank 1: passive or passive activity Blank 2: portfolio

A taxpayer's income or loss for the year is classified into one of three categories: income/loss, income/loss, and income/loss.

Blank 1: passive or passive activity Blank 2: portfolio Blank 3: active or active business

Regarding portfolio investments, dividends generally are taxed at capital gains rates and dividends are taxed at ordinary rates.

Blank 1: qualified or qualifying Blank 2: nonqualified, nonqualifying, ordinary, not qualified, non-qualified, or non qualified

When an investor sells or trades stock or securities at a loss and within 30 days either before or after the day of sale buys substantially identical stocks or securities a(n) occurs. (Enter only one word per blank.)

Blank 1: wash Blank 2: sale or sales

Please choose the statement that is INCORRECT regarding portfolio and passive investments?

Losses from portfolio investments are deductible in full against ordinary income.

Which of the following answers pertain to net short-term capital gains and losses? (Check all that apply.)

The holding period is one year or less. The gains are taxed at ordinary tax rates.

Which of the following choices describes the tax treatment for qualified dividends? (Check all that apply.)

The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate. The income may be taxed at a rate as high as 20%, depending on the taxpayer's taxable income.

Which of the following characteristics of a wash sale are CORRECT?

The loss generated by a wash sale is NOT deductible. The unrecognized loss is added to the basis of the newly acquired stock.

If a taxpayer has a long-term capital loss in the 15% category, how is it used to offset capital gains in the other rate categories?

The loss will first offset gains in the 28% category, then the 25% category; then the taxpayer may use it to offset short-term capital gains.

True or false: A suspended loss on a passive activity can be used to offset active and portfolio income in the year the taxpayer sells or divests of the activity.

True

True or false: Capital losses retain their character as short-term or long-term when they are carried forward to subsequent years.

True

True or false: Net passive income is included with net investment income and, therefore, may be subject to the 3.8% additional tax on net investment income.

True

Which of the following investments do NOT pay periodic interest payments, but rather accumulate interest over the life?

U.S. savings bonds

What type of gain is taxed at a maximum long-term capital gains rate of 25%?

Unrecaptured Section 1250 gain from the sale of business property

Which of the following statements is CORRECT regarding the sale of qualified small business stock (Sec. 1202 stock)?

Up to 100% of the gain could be excluded depending on the acquisition date.

In order for a taxpayer to be able to deduct up to $25,000 in rental losses against other types of income, her or she must be a(n) ______ participant in the rental activity.

active

Bob has capital losses of $4,000 that exceed his capital gains in the current year. Of this amount, $1,200 is a short-term capital loss and $2,800 is a long-term capital loss. The capital loss carryforward will be a $1,000 ______.

long-term capital loss because Bob must first use the short-term loss to offset ordinary income

If a taxpayer sells a personal-use asset at a gain, the taxpayer ______ recognize a capital gain. If a taxpayer sells a personal-use asset at a loss, the taxpayer ______ recognize a capital loss.

will; will not

Angie incurred capital gains and losses during the current year. She has a $12,000 net short-term capital loss; a $5,000 long-term capital gain in the 15% category; and a $15,000 long-term capital gain in the 28% category. How will these transactions be taxed after the gains and losses are combined?

$3,000 will be taxed at 28% and $5,000 will be taxed at 15%.

Chad incurred capital gains and losses during the current year. He has a $7,000 net short-term capital gain; a $14,000 long-term capital loss in the 15% category; and a $10,000 long-term capital gain taxed at 28%. How will these transactions be taxed after the gains and losses are combined?

$3,000 will be taxed at marginal rates.

Bridget, a single taxpayer, sold a building used in her business during the current year. The realized gain on the sale was $135,000. Of this amount, $95,000 is unrecaptured Section 1250 gain. How will Bridget be taxed on this gain assuming her marginal tax rate is 32 percent and her LTCG rate is 15%?

$95,000 will be taxed at 25 percent and $40,000 will be taxed at 15%.

Qi, Julian, and Omar are all in the 24% tax bracket. Qi has received $3,000 in corporate bond interest, Omar $2,500 in savings account interest, and Julian $2,500 in dividends from a US corporation. Rank the taxpayers by their tax liability from the amounts received, from least to greatest. Instructions

1. Julian's $2,500 2. Omar's $2,500 3. Qi's $3,000

Which one of the following tax rates does NOT currently apply to long-term capital gains?

37%

Which of the following statements regarding material participation is TRUE?

A taxpayer can be materially participating by being involved in more than one activity if the total hours of involvement meet certain levels.

Which of the following statements regarding material participation is FALSE?

A taxpayer must be involved in a business on a full-time basis throughout the year to be considered materially participating.

What term is used to denote the interest incurred on loans used to acquire investments?

Investment interest expense

Which of the characteristics below BEST describes the treatment of investment interest expense? (Check all that apply.)

Any amount of this expense that is NOT deducted in the current year due to the investment income limitations may be carried forward indefinitely. The interest deduction is limited to the taxpayer's net investment income for the year. This expense is deductible as an itemized deduction in the interest expense category.

Bailey stood in line for hours and purchased the new game system the day it became available for $600. Knowing that there was a high demand for the game system and a limited supply, she decided to put the item on E-bay rather than keep it. She sold it for $950. She also sold her five-year old car for $5,000. She had purchased the car for $13,000. What is the taxable nature of these transactions?

Bailey has a taxable short-term capital gain of $350, but no deductible loss for the car.

Section 1202 provides that owners of qualified small business stock that is sold during 2019 and has been held for at least five years can exclude up to percent of the gain from taxation depending on the acquisition date.

Blank 1: 100, one hundred, or 100%

The entire $25,000 deduction for rental real estate is phased out when the taxpayer's AGI reaches $ .

Blank 1: 150,000 or 150000

If a taxpayer is an active participant in a rental activity, she may be allowed to deduct up to $ in rental losses against other types of income.

Blank 1: 25,000 or 25000

Carly sold land that she purchased 10 years ago for $3,000. The selling price of the land was $7,000 and Carly paid broker's fees of $420. When she originally purchased the land, she paid $1,000 to clear some of the brush in order to make a walking path down to a nearby lake. In the ten years since the purchase, Carly paid $200 per year to keep the path maintained. Carly's amount realized on the sale was $ and her tax basis was $ resulting in a capital gain of $ for the year.

Blank 1: 6,580 or 6580 Blank 2: 4,000 or 4000 Blank 3: 2,580 or 2580

U.S. do NOT pay periodic interest payments, but the interest accumulates over the term of the bond.

Blank 1: Savings or Saving Blank 2: Bonds or Bond

Although losses from rental property are classified as passive losses, there is an exception that allows a taxpayer who is a(n) participant in a rental activity to deduct up to $ of the rental loss against nonpassive income.

Blank 1: active Blank 2: 25000 or 25,000

Assets that are held for investment or personal use assets are referred to as assets. (Enter only one word per blank.)

Blank 1: capital

Taxpayers can completely offset with capital losses. If an excess capital loss remains, married filing jointly taxpayers can deduct up to $ per year against ordinary income. The loss exceeding that amount is carried forward indefinitely.

Blank 1: capital Blank 2: gains or gain Blank 3: 3000 or 3,000

Assets such as works of art, antiques, stamps and coins held for more than one year are referred to as . The maximum capital gains tax rate applied to the gain on the sale of these assets is percent.

Blank 1: collectibles Blank 2: 28 or twenty-eight

LLCs, S Corporations, and partnerships do NOT pay taxes at the organization level; rather these types of activities are - entities whose operating income and losses are allocated to the owners of the entities. (Enter only one word per blank.)

Blank 1: flow or pass Blank 2: through

Taxpayers must (include/exclude) gains but (include/exclude) losses on the disposal of personal use assets from gross income.

Blank 1: include Blank 2: exclude

When taxpayers borrow money to acquire investments, the interest expense they pay on the loan is expense and the deduction is limited to the taxpayer's income for the year.

Blank 1: investment Blank 2: interest Blank 3: net Blank 4: investment

The net investment income tax is imposed on the of (a) net investment income or (b) the excess of AGI over a specific level depending on filing status.

Blank 1: lesser, lower, least, or smaller Blank 2: modified or M

Which of the following choices describe collectibles? (Check all that apply.)

Coin collections and stamp collections may qualify as collectibles. Alcoholic beverages held over a year can qualify as a collectible. A gain on collectibles is taxed at a maximum rate of 28 percent.

What is included in the calculation of the amount realized upon the sale of a capital asset? (Check all that apply.)

Fair market value of any other property received by the seller Cash received by the seller Broker's fees and other selling costs are deducted

True or false: All net capital gains are included in the definition of net investment income.

False

True or false: Interest income is generally taxed at lower capital gains rates.

False Reason: Interest income is taxed at ordinary rates, while dividend income is generally taxed at capital gains rates.

True or false: Income from passive investments may be taxed at ordinary rates, preferential rates, or may be exempt from taxation while income from portfolio investments will be taxed at ordinary rates.

False Reason: Passive investments generate ordinary income or losses. Portfolio income may be taxed a various rates or be exempt from taxation altogether.

True or false: Short-term capital gains are subject to preferential tax treatment when the capital gains rates are lower than the taxpayer's marginal income tax rate.

False Reason: Short-term capital gains are taxed as ordinary income. Long-term capital gains may receive preferential tax rates.

Which of the following statements is INCORRECT regarding losses on rental activities?

In order to deduct a loss from a rental activity, the owner must be a material participant in the rental activity.

Which of the following statements is correct?

Interest income is typically taxed at ordinary rates.

Which of the following is NOT a hurdle that the taxpayer must clear to be eligible to deduct an operating loss from a flow-through entity?

Net investment limits

Please choose the statement that is INCORRECT when referring to net passive income?

Net passive income is taxed at long-term capital gains rates.

Which of the following types of income are generally included in the calculation of investment income? (Check all that apply.)

Net short-term capital gains Nonqualified dividends Interest income

Which of the following types of income is generated from passive investments rather than portfolio investments?

Operating income

Which of the following statements is INCORRECT regarding flow-through entities?

Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer.

Match the expense with the tax treatment related to that expense. Instructions

Other Investment expense - Not deductible Investment Interest expense - Interest expense itemized deduction

Which of the following assets would qualify as capital assets? (Check all that apply.)

Personal residence Coin collection Corporate stock Land held for investment

Regarding portfolio investments, which types of income generally are taxed at a rate lower than the taxpayer's marginal tax rate? (Check all that apply.)

Qualified dividends Long-term capital gains

Which of the following types of transactions results in capital losses that are deductible for tax purposes?

Sales of investment assets

Which of the following types of transactions result in capital losses that are NOT deductible for tax purposes? (Check all that apply.)

Sales of personal-use assets Sales to related parties Wash sales

Which of the following choices concerning the recognition of interest income for corporate bond are CORRECT? (Check all that apply.)

The actual interest payments received are included in gross income. If bonds are purchased at a premium in the secondary market, the premium can be amortized or added to the basis of the bond. If bonds were issued at a discount, special original issue discount rules apply.

Which of the following choices determine the amount and the timing for recognizing interest income? (Check all that apply.)

The actual interest payments received are included in gross income. If bonds were issued at a premium, taxpayers may amortize the premium over the life of the bond resulting in a decrease in interest income. If bonds are purchased at a discount in the secondary market, the discount is recognized as interest income at maturity.

Which of the statements regarding the deductibility of a suspended passive loss are true? (Check all that apply.)

The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity. The suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity.

In order for a taxpayer to be able to deduct the loss on a business activity that he is involved in, which of the following must be true?

The taxpayer must materially participate in the business.