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Lecture Fundamentals of taxation 2014 (7/e) - Chapter 13: At-risk/passive activity loss rules and the individual alternative minimum tax

When you have completed this chapter, you should understand the following learning objectives: Explain the process of applying the at-risk rules, describe the rules and applications related to passive activities, explain how the passive activity loss rules and at-risk rules work together to limit the deductibility of losses, explain the alternative minimum tax and how it is calculated. | Chapter 13 At-Risk/Passive Activity Loss Rules and The Individual Alternative Minimum Tax “Never let the tax tail wag the economic dog.” -- Laura Peebles 1 13-2 LO #1- At-Risk Rules At-risk activities include any “engaged in carrying on a trade of business or for the production of income.” Initial amount at-risk is any contribution of money plus the adjusted basis of contributed property. 2 An activity is “at-risk” if the taxpayer has something to lose. At-risk starts with the amount of money and property the taxpayer contributes to an activity. 13-3 LO #1- At-Risk Rules What is “at-risk” or increases “at-risk?” Cash and property contributions Share of liabilities Income and gain items What decreases “at-risk?” Cash and property distributions Release of liabilities 3 At-risk is increased by contributions, income items, and by an increase in the taxpayer’s share of liabilities. Conversely, distributions, loss items, and releases of liabilities decrease at-risk. 13-4 LO #1- At-Risk Rules Form 6198 is filed for each activity subject to the at-risk limitations Liabilities that affect at-risk amount Recourse debt Nonrecourse debt Qualified nonrecourse debt 4 Liabilities can be recourse, nonrecourse, or qualified nonrecourse. Recourse and qualified nonrecourse liabilities increase the taxpayer’s at-risk amount. 13-5 LO #1- At-Risk Rules Losses disallowed under the at-risk rules Carried over indefinitely Deducted in years when the at-risk amount increases Losses may still be subject to the passive loss limitations 5 Losses are only allowed to the extent a taxpayer is at-risk for an activity. If a loss is disallowed under the at-risk rules, the loss is carried over indefinitely and is allowed when the at-risk amount increases in future years. 13-6 LO #2 – Passive Activities What is a Passive Activity? Taxpayer does not materially participate on a Regular Continuous Substantial basis Most rental activities and limited partnership interests are passive by definition 6 A . | Chapter 13 At-Risk/Passive Activity Loss Rules and The Individual Alternative Minimum Tax “Never let the tax tail wag the economic dog.” -- Laura Peebles 1 13-2 LO #1- At-Risk Rules At-risk activities include any “engaged in carrying on a trade of business or for the production of income.” Initial amount at-risk is any contribution of money plus the adjusted basis of contributed property. 2 An activity is “at-risk” if the taxpayer has something to lose. At-risk starts with the amount of money and property the taxpayer contributes to an activity. 13-3 LO #1- At-Risk Rules What is “at-risk” or increases “at-risk?” Cash and property contributions Share of liabilities Income and gain items What decreases “at-risk?” Cash and property distributions Release of liabilities 3 At-risk is increased by contributions, income items, and by an increase in the taxpayer’s share of liabilities. Conversely, distributions, loss items, and releases of liabilities decrease at-risk. 13-4 LO #1- At-Risk .