Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 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 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 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 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 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 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 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 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 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 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 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) 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) 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) Depreciation adjustments –Real property 1987 – 1999 – 40 years life of all real property for AMT –Real property after 1998 – no AMT adjustment –Personal property – 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) 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) 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