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This post addresses passive loss and research tax questions.

A Lovers' Triangle and the Passive Loss Rules.
The troubled marriage of john and Eleanor finally reached an impasse, and they mutually agreed to divorce. shortly after the divorce was finalized, John married Kristen. The three have known each other for years from working together to harvest the grapes of a vineyard owned by john. Prior to the divorce, each had worked 200 hours in the vineyard in the current year. The investment generates a loss for the current year, and john wants to classify the loss as active, the participation of john and his spouse together must exceed 500 hours. John claims that meeting that threshold is not a problem. He worked 200 hours, and Eleanor, who has his wife when the work was done, worked 200 hours. Kristen, who files a joint return with john, also worked 200 hours. John feels it is proper to aggregate Eleanor and Kristen's participation with his own. This approach makes the loss deductible in full. "Besides" says John, "there is nothing in the law that says I can't do this".
1. Discuss the factors that should be considered when evaluating active and passive losses.
2. Evaluate John's intention to deduct the loss as "active".
3. Assess the potential consequences of his actions.

When Does Research Qualify for R&D?
the research activities credit is designed to encourage taxpayers to engage in research related to the discovery of technological information for use in developing a new or improved business component of the taxpayers. You are employed as a staff accountant for a privately held corporation that manufactures medical equipment. During the current year, the corporation purchases new communications software and related document-management system with the goal of enhancing employee efficiency and productivity. To familiarize employees with these new systems, an outside firm is hired to conduct training seminars during the first six months after the software is installed. Substantial costs are incurred in connection with these training seminars. Not surprisingly, the firm encounters various inefficiencies until the employees have had sufficient training and time to learn the new systems. The corporation's new president, ever mindful of the company's profitability and tax position, urges you to claim the research activities credit with respect to the software training costs. The president justifies this position on the grounds that the employees were "researching" the new software and its use.
1. Discuss the factors to consider when determining eligibility for the R&D Tax Credit.
2. Discuss your reaction to the president's approach of R&D deduction related to the software training costs.
3. Explain the consequences that the president may face related to his decision.

Solution Preview

1. Discuss the factors that should be considered when evaluating active and passive losses.

A passive activity is an activity in which you do not materially participate in the operation of the activity. Material participation (active) requires the taxpayer to regularly interact with operating the business or activity. An activity is considered to have material participation if the taxpayer participated in the activity for a minimum of 500 hours; if not, it's considered passive. The active participation hours also include one's spouse, which are then combined with the taxpayer's participation to total at least 500 hours. Essentially, in a passive activity there is little involvement from the taxpayer with the exception of real estate property. Most real estate property is considered a passive activity even though there is typically material participation. In an active loss situation, the participation must enhance the operating and/or functioning of the business in a way that contributes at least 500 hours of work to the business.

2. Evaluate John's intention to deduct the loss as "active".

Prior to the divorce, John worked 200 hours in the vineyard while married to Eleanor. While they were married, she also worked 200 hours in the vineyard. ...

Solution Summary

This solution explains two tax scenarios:

A Lovers' Triangle and the Passive Loss Rules
When Does Research Qualify for R&D?

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