Question

1. Discuss the treatment of suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?

2. List four factors that, if performed by the employer, indicate a common law employee/employer relationship.

Answer 1

1) Losses and credits which can’t be used by taxpayers because of the passive loss limitation rules ,are suspended and carry over to be offset against future passive activity income which is indefinite. A taxpayer can apply suspended losses against passive activity income from any source, not just from the activity that created the loss.

When a taxpayer disposes of the entire interest in a passive activity, that activity is no longer subject to the passive activity rules. If the activity is disposed of in a fully taxable transaction to an unrelated party, both current and suspended passive activity losses generated by that activity can be deducted. Loss on sale of activity can also be deducted.

Suspended passive losses (allowed) are taken into account for net investment income tax purposes in the same manner in which they are taken into account for regular income tax purposes. Therefore, losses allowed may constitute properly allocable deductions or may be included in the calculation of net gain in the year they are allowed, depending on the underlying character and origin of the losses.

2)

1. If the employer has right to instruct about What when and how to work.

2. Requires to work from employer ‘s premises or any other location designated.

3. Requires to submit report of work done.

4. Determining hours of work.