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Norma Wahnon
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A practice booklet with multiple choice and true/false questions for each Module of the 1040 Exam Prep e-Books series is coming out soon. Stay tuned!
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Mutiple Choice Practice Question Passive activity loss
In the current year, a taxpayer reports the following items:
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Salary
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$50,000
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Income from partnership A, in which the taxpayer materially participates
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20,000
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Passive activity loss from partnership B
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(40,000)
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During the year, the taxpayer disposed of the interest in partnership B, which had a suspended loss carryover of $10,000 from prior years. What is the taxpayer's adjusted gross income for the current year?
a. $20,000
b. $30,000
c. $60,000
d. $70,000
Solution:
Choice "a" is correct. The $50,000 salary and income from partnership activity of $20,000 are taxable. Typically, passive activity losses, whether in the current or prior years, may only be used to offset passive activity income. The exception to this is in the year the passive activity is disposed of (sold), if still unused, passive activity losses are fully deductible in the year of disposal:
+Salary $50,000
+ Income from partnership A 20,000
- PAL from partnership B (40,000)
- Loss carryover from partnership B (10,000)
=Adjusted gross income $20,000
(Source: Questions and answers published by AICPA) |
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Tax term definition section |
Tax term definition
"Highly Compensated Employee"
Highly Compensated Employee - An individual who:
- Owned more than 5% of the interest in a business at any time during the current year or the preceding year, regardless of how much compensation that person earned or received, or
- For the preceding year, received compensation from the business of more than $110,000 (if the preceding year is 2010 or 2011, or $115,000 if the preceding year is 2012), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
(Source: Questions and answers published by AICPA)
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