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Taxation Questions

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Week 3 Home Work
Chapter 7: Deductions: Business/Investment Losses and Passive Activity Losses
Chapter 8: Deductions: Itemized Deduction
Questions: 7-7 and 7-13
Problems (Show your work.): 7-46, 8-34, and 8-40
7. Differentiate between the following: active income, passive income, and portfolio income.
1.Active Income
Income an individual earns through participating in some activity with the goal of earning income. Also referred to as earned income.
2.Passive Income
Income earned through a trade or investment in which the individual does through little or no effort.
Ex:Rental property income managed by management company.
3.Portfolio Income
Income is derived directly from investments such as stock earnings, mutual fund investments, or interest income.

13. Briefly, what is "material participation"? Why is the determination of whether a taxpayer materially participates important?
Material participation is the point at which an individual becomes Actively or Continuously involved in a project . Earned revenue from the project is no longer considered passive income.
This is important as this determines whether income is active or passive inconsideration of how loses are deducted and how this income is taxed.

46. Mary Beth is a CPA, devoting 3,000 hours per year to her practice. She also owns an office building in which she rents out space to tenants. She devotes none of her time to the management of the office building. She has a property management firm make all management decisions for her. During 2011, she incurred a loss, for tax purposes, of $30,000 on the office building. How must Mary Beth treat this loss on her 2011 tax return?

Mary must treat this as a passive loss because she is using a property management company. She makes no management decisions. Her rental activity does not...

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