Maximizing Investor Losses After reviewing the scenario, compare and contrast the at-risk rules and passive activity limits. Discuss the purpose for each, and suggest at least two (2) tax-planning strategies for ensuring that the IRS allows passive losses in order to reduce your tax liability. Provide support for your suggestion. Imagine that you in the process of creating a new business structure and have to choose between a personal service corporation and one that is closely held. Consider the tax deductions, at-risk rules, and passive loss limitations, and recommend the type of structure that has the greatest potential to minimize your tax liability. Defend your positon. ACC 307 Week 7 Scenario Script: Investor Losses Slide # Scene/Interaction Narration Slide 1 This is a scene that introduces the setting for the scenario. It has a shot of the tax firm and a welcome message. There is a button to start labeled “Enter.” Slide 2 Scene 1 Wade and Carmen inside the accounting firm, in a conference room. Wade: Hi, Carmen. Great job in resolving the issues from last week with Jonathan Dixon. As long as Jonathan uses over-the-counter holistic medicine and procedures not prescribed by his doctor, unfortunately, the medical expenses will not be deductible. Jonathan will be able to maximize his deductions by increasing his charitable contributions, especially considering that he is in a high tax bracket. Carmen: He will also be able to increase his charitable deductions by either contributing cash or capital gain property. Although he cannot contribute more than fifty percent of his adjustable gross income, he can make cash and non-cash contributions. Wade: We can also advise him to contribute capital gain property, although there is a thirty percent maximum contribution to tax-exempt organizations. Carmen:Instead of trying to increase his spending for non-deductible medical expenses, he should increase his charitable contributions to reduce his tax liability. Wade: Exactly! All right, Carmen, let’s get started with our work for this week, where our focus will be on Investor Losses. Carmen: I’m ready to get started! Slide 3 Scene 2 Wade and Carmen in his office Wade: Jonathan Dixon called and said that he found more documents that might help reduce his tax liability. I’ll set up the meeting for this afternoon. Carmen: All right! Thanks, Wade! Slide 4 Scene 3 Wade, Carmen and Jonathan Dixon in the conference room. Wade: Jonathan, welcome back. I’m going to sit back and let you two get to work. Jonathon Dixon: Thanks, Wade. Carmen, I forgot to bring my other tax documents with me the last time I was here. I own several rental properties that are managed by a management company, but I’m considering managing them myself, if it will help. I also have substantial investments and I’m considering selling some of them this year to invest in a closely held corporation. How would you recommend that I handle these issues? Carmen:Tha ...

1. Maximizing Investor Losses
After reviewing the scenario, compare and contrast the at-risk
rules and passive activity limits. Discuss the purpose for each,
and suggest at least two (2) tax-planning strategies for ensuring
that the IRS allows passive losses in order to reduce your tax
liability. Provide support for your suggestion.
Imagine that you in the process of creating a new business
structure and have to choose between a personal service
corporation and one that is closely held. Consider the tax
deductions, at-risk rules, and passive loss limitations, and
recommend the type of structure that has the greatest potential
to minimize your tax liability. Defend your positon.
ACC 307 Week 7 Scenario Script: Investor Losses
Slide #
Scene/Interaction
Narration
Slide 1
This is a scene that introduces the setting for the scenario.
It has a shot of the tax firm and a welcome message. There is a
button to start labeled “Enter.”
Slide 2
Scene 1
Wade and Carmen inside the accounting firm, in a conference
room.
Wade: Hi, Carmen. Great job in resolving the issues from last
week with Jonathan Dixon.
As long as Jonathan uses over-the-counter holistic medicine and
procedures not prescribed by his doctor, unfortunately, the
medical expenses will not be deductible. Jonathan will be able
to maximize his deductions by increasing his charitable
contributions, especially considering that he is in a high tax
bracket.

2. Carmen: He will also be able to increase his charitable
deductions by either contributing cash or capital gain property.
Although he cannot contribute more than fifty percent of his
adjustable gross income, he can make cash and non-cash
contributions.
Wade: We can also advise him to contribute capital gain
property, although there is a thirty percent maximum
contribution to tax-exempt organizations.
Carmen:Instead of trying to increase his spending for non-
deductible medical expenses, he should increase his charitable
contributions to reduce his tax liability.
Wade: Exactly! All right, Carmen, let’s get started with our
work for this week, where our focus will be on Investor Losses.
Carmen: I’m ready to get started!
Slide 3
Scene 2
Wade and Carmen in his office
Wade: Jonathan Dixon called and said that he found more
documents that might help reduce his tax liability. I’ll set up the
meeting for this afternoon.
Carmen: All right! Thanks, Wade!
Slide 4
Scene 3
Wade, Carmen and Jonathan Dixon in the conference room.
Wade: Jonathan, welcome back. I’m going to sit back and let
you two get to work.
Jonathon Dixon: Thanks, Wade.
Carmen, I forgot to bring my other tax documents with me the
last time I was here.

3. I own several rental properties that are managed by a
management company, but I’m considering managing them
myself, if it will help.
I also have substantial investments and I’m considering selling
some of them this year to invest in a closely held corporation.
How would you recommend that I handle these issues?
Carmen:That's what we're here for, Mr. Dixon. Let me think
about this, and I’ll get back to you.
Slide 5
Scene 4
Interaction Slide
Interaction
Key Chapter provisions
Title: Investor Losses
Introduction: Investors who sustain losses from passive
business activity can reduce their tax liability. However,
passive losses require the taxpayer to separate all income and
losses into three categories known as active, passive, and
portfolio. Active income is typically from wages, while
portfolio income is from dividends and interest. Passive income
is from activities where business owners are not involved in the
day-to-day operations. In general, passive loss rules disallow
deductions for passive losses against active or portfolio income.
Tab 1:The at-risk provisions limit the deductibility of losses
from business and income-producing activities to the amount of
cash and the adjusted basis of property, plus amounts borrowed
for use in the activity.
Tab 2: When losses cannot be used during the tax year, they can
be carried over to subsequent years to offset against passive
income.
Tab 3: If a taxpayer materially participates in a non-rental trade
or business activity, a loss from the activity is treated as an

4. active loss that can be offset against active or portfolio income.
Tab 4:The rental of real estate is an exception to the passive
loss rule. If a taxpayer materially participates in a real estate
trade or business, losses are not treated as passive. However,
the taxpayer must materially participate and perform more than
seven hundred and fifty hours of service.
Tab 5: A corporation is classified as a closely-held corporation
if more than fifty percent of the value of outstanding stock is
owned directly or indirectly by five or fewer individuals.
Slide 6
Scene 5
Circle Interaction
From the information provided, under what circumstances
would passive losses be deductible?
1. Since Mr. Dixon is currently not spending any time managing
his real estate properties, then no passive losses can be deducted
from active income.
2. If Mr. Dixon would manage the properties and spend more
than seven hundred fifty hours, then the passive losses could
offset by active income.
3. Investing in the closely-held company would also allow any
passive losses to offset active income but not portfolio income.
4. In order for participation in real estate to qualify as the
exception, the taxpayer must materially participate in the
activity by performing more than one half of personal service in
real estate AND perform more than seven hundred and fifty
hours of service in real property trades.
Carmen: If Mr. Dixon materially participates in his rental
activities, he will be able to deduct up to twenty-five-thousand
dollars from real estate activities from active or portfolio
income. As it stands now, since his property manager spends
time managing his properties, he can only offset passive losses
against other passive income.
If there are excess losses, they must be suspended or carried
over to future years when enough passive income is generated to

5. absorb the losses.
Investing in the closely-held corporation is also a good idea
since any losses can offset his active income.
Slide 7
Scene 6
Carmen and Wade in Wade's office
Wade: Carmen, I agree with your advice to Jonathon. Let’s
review a draft of his tax return and determine what other tax
planning strategies we can develop to minimize his tax liability.
Slide 8
Scene 7
Carmen, Jonathan Dixon, and Wade in the conference room
Carmen: Hey Mr. Dixon, we have a draft of your tax return for
review.
We recommend that you consider managing the rental properties
yourself instead of using the property manager. In doing so, you
can increase your hours to satisfy the requirement of material
participation. The benefit is that you can deduct up to twenty-
five-thousand dollars against your active or portfolio income.
Also, we do suggest that you invest in the closely-held
corporation to decrease your income for future losses because
those losses can offset active income but not portfolio income.
Please review the draft of the return, and if there are no
changes, we are ready to file the changes.
Jonathon Dixon: Thanks, Carmen. I’m glad that I consulted with
you regarding the real estate activity. I could certainly benefit
from the passive losses since I will be renovating several
properties this year.
Carmen: You’re very welcome! Let me know if there is
anything else you need.
Slide 9

6. Scene 8
Wade in his office
Wade:Well, it's approaching the end of the day. We have
reviewed the complexities of investor losses and the restrictions
on utilizing losses to offset active income. I recommend that
you continue to review the contents of Publication Seventeen to
prepare for our next topic next week, which will be Tax Credits
and Payments.
By the way, don’t forget to participate in this week’s discussion
questions.
I’ll see you next week!