Acc 553 Week 3 Assignment

7-7 Differentiate between the following: active income, passive income, and portfolio income.

Active Income - Income for which services have been performed. This includes salaries, wages, tips, commissions and derived income.

Passive Income - Earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved.

Portfolio Income - Income from investments, dividends, interest, royalties and capital gains. Portfolio income does not come from passive investments and is not earned through normal business activity.

7-13 Briefly, what is "material participation"? Why is the determination of whether a taxpayer materially participates important?

Material participation is the threshold at which an individual spends enough time on a specific project that they can no longer be considered a passive investor in the project. At this point they are considered to be actively involved. The importance in this from tax perspective lies in whether any income or loss from an activity results in “active” income or loss. Without material participation, the income or loss may be “passive” income or loss for tax purposes. Satisfaction of any one qualifies as material participation:

1. Taxpayer participates more than 500 hours per year.

2. Taxpayer’s participation is substantially all of the work done in the activity.

3. Taxpayer participates more than 100 hours per year and not less than any other person, including non-owners.

4. Taxpayer participates more than 100 hours per year in each of several activities, totaling more than 500 hours per year in all such activities.

5. Taxpayer materially participated in the activity for five of any of the last ten prior tax years.

6. If the activity is a personal service activity, taxpayer material participates in any three prior years.

7. Based on all facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial...