Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 13 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
13-2
LO #1- At-Risk RulesLO #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.
13-3
LO #1- At-Risk RulesLO #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
13-4
LO #1- At-Risk Rules 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
13-5
LO #1- At-Risk RulesLO #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
13-6
LO #2 – Passive ActivitiesLO #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
13-7
LO #2 – Passive ActivitiesLO #2 – Passive Activities
• Seven tests for material participation– > 500 hours– All of the participation in the activity– > 100 hours and not less than any other person– > 100 hours and several activities that in aggregate
exceed 500 hours– Material participant for any of the last five years of
ten years– Material participant for any of last three years for
personal service activity– Facts and circumstances
13-8
LO #2 – Passive ActivitiesLO #2 – Passive Activities
• Passive Losses – General Rule– Passive losses are allowed only to the extent of
passive income
• Income/loss items separated into three categories– Active Income/Loss– Portfolio Income– Passive Income/Loss
• Passive losses cannot offset portfolio or active income
13-9
LO #2 – Passive ActivitiesLO #2 – Passive Activities
• Rental Activities – usually passive• Real estate professional exception• Six other instances where rental is not
passive– Rental period less than seven days– 30 days or less and significant personal services– Extraordinary personal services– Incidental to non-rental activity– Customarily available during defined business
hours– Rented to an entity the taxpayer owns
13-10
LO #2 – Passive ActivitiesLO #2 – Passive Activities
• $25,000 loss allowed for rental activities– Active participation– Own at least 10% of property
• Starts to phase out when AGI reaches $100,000, not including the rental loss.
• Eliminated when AGI exceeds $150,000
13-11
LO #2 – Passive ActivitiesLO #2 – Passive Activities
• Disposition of a passive activity in a taxable transaction.– Passive losses are allowed against non-
passive income– Suspended passive losses are permitted– Gifts and inheritance do not trigger use of
suspended losses (does not meet taxable transaction criterion)
13-12
LO #3 – At-Risk and PAL Rules In Conjunction
LO #3 – At-Risk and PAL Rules In Conjunction
• At-risk rules applied first, then passive loss rules second.
• Form 6198 for each at-risk activity• Form 8582 – one for all passive
activities• PAL rules do not come into play unless
the loss is first allowed under the at-risk rules
13-13
LO #4 – Alternative Minimum Tax (AMT)LO #4 – Alternative Minimum Tax (AMT)
• AMT Formula– Regular taxable income– Plus exemptions and standard deduction– Plus/minus adjustment items– Plus tax preference items– Minus AMT exemption amount– Multiplied by 26% or 28% less $3,590– Tentative AMT less regular tax– Equals AMT
13-14
LO #4 – Alternative Minimum Tax (AMT)LO #4 – Alternative Minimum Tax (AMT)
• Adjustments – limits on itemized deductions– Medical – AGI floor increased to 10% - - in 2013
only taxpayer over 65 have a 7.5% floor for regular tax.
– Taxes – not allowed for AMT– Mortgage interest – must be to build, buy, or
improve residence– Charity – no adjustment– Casualty and theft – no adjustment– Miscellaneous – not allowed for AMT
13-15
LO #4 – Alternative Minimum Tax (AMT)LO #4 – Alternative Minimum Tax (AMT)
• Depreciation adjustments– Real property 1987 – 1999 – 40 years life
of all real property for AMT– Real property after 1998 – no AMT
adjustment– Personal property 1987 -1998 – longer life
and method change to 150% declining balance
– Personal property after 1998 – method change to 150% declining balance for AMT
13-16
LO #4 – Alternative Minimum Tax (AMT)LO #4 – Alternative Minimum Tax (AMT)
• Other adjustments– Basis calculation for gains and losses– Incentive stock options adjustment– Adjustments from K-1s– Long-term contracts
• Tax preference items – not much of an issue any longer
13-17
LO #4 – Alternative Minimum Tax (AMT)LO #4 – Alternative Minimum Tax (AMT)
• Exemption amount amounts could change due to law change after publication– Single $51,900– MFJ $80,800– MFS $40,400
• Phase-out – exemption is reduced by 25% of AMTI in excess of income limits– $115,400 single, $153,900 MFJ, $76,950
MFS
