Practice Quiz

Financial Planner

Category - Tax Planning

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What is the purpose of passive activity and at-risk rules?
  1. To prevent businesses from incurring losses
  2. To prevent taxpayers from investing in high-risk businesses
  3. To prevent taxpayers from purposely losing money through a business in order to pay less tax on other income
  4. To keep the economy from growing too quickly
Explanation
Answer: C - In the past, investors could potentially take losses of more than the economic loss that he or she could accrue as part of the investment. Because some investors took advantage of this and intentionally invested in unprofitable enterprises so they could reduce their taxable income, Congress put limits on losses from certain types of investments.
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