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    Income and Material Participation

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

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

    3. 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 2010, she incurred a loss, for tax purposes, of $30,000 on the office building. How must Mary Beth treat this loss on her 2010 tax return?

    4. Mike and Sally Card file a joint return for the 2010 tax year. Their adjusted gross income is $65,000 and they incur the following interest expenses:
    Qualified education loans $3,500
    Personal loan $1,000
    Home mortgage loan $4,000
    Loan used to purchase a variety of stocks, bonds, and securities $15,000

    Investment income and related expenses amount to $7,000 and $500, respectively. What is Mike and Sally's interest deduction for the 2010 tax year?

    5. In each of the following independent cases determine the amount of charitable contributions allowed the individual before consideration of any percentage limitations.

    a. Charlie Chubbs contributed an item of inventory from his sole proprietorship to a public charity for its use. The fair market value of the asset was $800 and his basis was $600.
    b. Durwood Dodson contributed some shares of common stock that he had held long-term to a private charity. The basis of the stock was $8,000 and it had a fair market value of $7,000.
    c. Esther Ensign contributed tangible personal property that she had held long-term to a public charity. The asset had a fair market value of $10,000 and a basis of $6,000. The charity intended to sell the asset and use the proceeds for charitable purposes.

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    Solution Preview

    1. Active income (wages, tips, salaries and commissions) is income from work or service performed and from a business that you have actively participated in, passive income is earnings that a person gets from rental property, limited partnership or other types of enterprises in which a person does not actively participate and portfolio income is earnings that come investments such as dividends, interest or capital gains (www.investopedia.com).

    2. Material participation is an IRS classification for working in a business on a regular, continuous and substantial basis (www.business.youdictionary.com). It is important to determine whether a taxpayer is materially participates because without material participation, a taxpayer is considered an investor and its losses are passive and usually not deductible except against passive income (www.business.youdictionary.com).

    3. Mary Beth will ...

    Solution Summary

    The solution discusses various question regarding income and material participation.

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