Week 3 Homework

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Week 3 Homework

Question 7-7:

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

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

Passive Income: Income received on a regular basis with little or no effort. This includes rent from rental property, pensions, and royalties.

Portfolio Income: Income from investments like stocks and bonds, dividends, royalties, and capital gains.

Question 7-13:

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

Material participation determines if an income is active income. A number of tests can be done to determine whether a individual is a material participant or not. Material Participation is important because it evaluates if the income earned from an activity is considered as active income or passive income. The recognition from passive income to active income is important because that determines how losses are deducted. Loses from passive income are not deductible but they are deductible against other passive income. Loses from active income can be deducted against all income.

Problem 7-46:

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 2012, she incurred a loss, for tax purposes, of $30,000 on the office building. How must Mary Beth treat this loss on her 2012 tax return?

The office building loss of 30,000 dollars is from passive income and Mary Beth can only deduct this passive loss against other passive income. This is done on a schedule E. Mary Beth cannot use this loss to lower a taxable income. She will have to carry the loss forward for future years.

Problem 8-34:...