SEE - Special Enrollment Exam Quiz: Business Losses And Credits
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Business Losses And CreditsQuestion 1 of 14

Priya is a limited partner in a partnership that owns and leases commercial equipment. She does not materially participate in the partnership. Before considering the current-year loss, her adjusted basis in the partnership interest is $75,000, consisting of her $25,000 cash contribution and her $50,000 share of a nonrecourse loan used to buy the equipment. For 2025, the partnership allocates a $60,000 loss to Priya. She has $40,000 of passive income from other limited partnerships and no other passive activities.

What is the correct treatment of the $60,000 allocated loss on Priya's 2025 return?

She deducts $60,000 because her adjusted basis is $75,000, and she has enough passive income.
She deducts $40,000, the amount of her passive income; the remaining $20,000 is suspended as a passive activity loss.
She deducts $25,000; the remaining $35,000 is suspended until her at-risk amount in the partnership increases.
She deducts $25,000; the remaining $35,000 is permanently disallowed because nonrecourse debt is not at risk.
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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Business Losses And Credits

Practice Business Losses And Credits in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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Question 1

Priya is a limited partner in a partnership that owns and leases commercial equipment. She does not materially participate in the partnership. Before considering the current-year loss, her adjusted basis in the partnership interest is $75,000, consisting of her $25,000 cash contribution and her $50,000 share of a nonrecourse loan used to buy the equipment. For 2025, the partnership allocates a $60,000 loss to Priya. She has $40,000 of passive income from other limited partnerships and no other passive activities.

What is the correct treatment of the $60,000 allocated loss on Priya's 2025 return?

  1. She deducts $60,000 because her adjusted basis is $75,000, and she has enough passive income.
  2. She deducts $40,000, the amount of her passive income; the remaining $20,000 is suspended as a passive activity loss.
  3. She deducts $25,000; the remaining $35,000 is suspended until her at-risk amount in the partnership increases. (correct answer)
  4. She deducts $25,000; the remaining $35,000 is permanently disallowed because nonrecourse debt is not at risk.
Explanation: IRC § 465 limits a loss to the amount the taxpayer has at risk in the activity. Priya's $25,000 cash contribution is at risk, but her share of the nonrecourse equipment debt is not at risk because it is not qualified nonrecourse real estate financing. Her adjusted basis is $75,000, so the basis limitation does not bind, but the at-risk limitation permits only $25,000 of the $60,000 loss; the remaining $35,000 is suspended under § 465 and may be deducted in a later year when her at-risk amount increases, subject to the passive activity rules. Choice A ignores the at-risk limitation and relies only on basis and passive income. Choice B applies the passive activity limit before the at-risk limit. Choice D is wrong because the suspended loss is not permanently disallowed.

Question 2

Tyler, a sole proprietor, has $120,000 of regular income tax liability for 2025 before any general business credits and a tentative minimum tax of $30,000. His regular tax exceeds the tentative minimum tax, so no AMT is imposed. He has $100,000 of general business credits from his business. Tyler does not qualify as an eligible small business for purposes of the general business credit limitation. No foreign tax credit or other credits apply.

What is the maximum general business credit Tyler may claim for 2025, and what happens to any unused credit?

  1. He may claim $90,000; the unused $10,000 is carried back 1 year and then forward 20 years. (correct answer)
  2. He may claim $100,000; the unused amount is lost because business credits are nonrefundable.
  3. He may claim $96,250; the unused $3,750 is carried back 1 year and then forward 20 years.
  4. He may claim $76,250; the unused $23,750 is carried back 1 year and then forward 20 years.
Explanation: IRC §38(c) limits the general business credit for the year to net income tax minus the greater of tentative minimum tax or 25% of net regular tax liability exceeding $25,000. Because no other credits apply, Tyler's net income tax is 120,000.BecauseTylerisnotaneligiblesmallbusiness,the§38(c)(4)ruletreatingtentativeminimumtaxaszerodoesnotapply.Here,25120,000. Because Tyler is not an eligible small business, the §38(c)(4) rule treating tentative minimum tax as zero does not apply. Here, 25% of (120,000 − $25,000) is $23,750, and the tentative minimum tax is $30,000, so the greater amount is $30,000. The credit is therefore limited to $120,000 − $30,000 = $90,000. Under IRC §39, the unused $10,000 is carried back 1 year and then carried forward up to 20 years. Choice B ignores the statutory limitation. Choice C uses the 25% limitation alone and ignores the tentative minimum tax. Choice D subtracts the 25% amount from the total credits rather than from the tax liability.

Question 3

A taxpayer owns a limited partnership interest in an activity in which she does not materially participate and has $30,000 of suspended passive activity losses from that interest. During 2025, she sells her entire interest in the activity in a fully taxable transaction and realizes a $15,000 gain. She has $60,000 of wages and no other passive income or losses for 2025. Which of the following correctly describes the treatment of the suspended losses on her 2025 return?

  1. Only $15,000 of the suspended losses is deductible for 2025 because passive activity losses may offset only passive income; the remaining $15,000 continues to be suspended.
  2. The entire $30,000 of suspended losses remains suspended and may be deducted in later years only to the extent she has passive income from other activities.
  3. The $30,000 of suspended losses is deductible against her wage income, and the $15,000 gain is deferred until she has passive losses to absorb it.
  4. $15,000 of the suspended losses offsets the gain on the sale, and the remaining $15,000 is deductible against her wage income. (correct answer)
Explanation: IRC § 469(g)(1). When a taxpayer disposes of her entire interest in a passive activity in a fully taxable transaction, the suspended passive activity losses from the activity are released. They are applied first against the net income or gain from the activity for the year of disposition, including the $15,000 gain on the sale, and the remaining $30,000 - $15,000 = $15,000 is treated as a loss that is not from a passive activity, deductible against other income such as wages. Choice D is correct. Choice A applies the general passive activity loss rule and drops the disposition exception that releases the suspended losses in the year of sale. Choice B ignores the disposition exception entirely; the losses are not carried to later years to await future passive income. Choice C releases the losses but wrongly defers the gain; the gain on a fully taxable sale is recognized and is absorbed by the suspended losses before any remainder becomes nonpassive.

Question 4

Marcus and Elena file a joint return. In 2025, Marcus had $120,000 of wages. Elena owns a sole proprietorship that had $100,000 of gross income and $800,000 of deductible business expenses. Elena materially participates in the business, the business is not a passive activity, and her amount at risk in the business is not less than the loss. The couple also had $20,000 of taxable interest.

What is the correct treatment of Elena's Schedule C loss on their 2025 return?

  1. $700,000 of the loss is allowed, and no amount is treated as a carryover.
  2. $626,000 of the loss is allowed, and the remaining $74,000 is treated as an NOL carryover to 2026. (correct answer)
  3. $313,000 of the loss is allowed, and the remaining $387,000 is treated as an NOL carryover to 2026.
  4. $74,000 of the loss is allowed, and the remaining $626,000 is treated as an NOL carryover to 2026.
Explanation: IRC § 461(l) limits the aggregate business deductions of a noncorporate taxpayer to the sum of aggregate business gross income or gain plus the threshold amount. For 2025, the MFJ threshold is $626,000. The facts state that Elena has sufficient amount at risk and the business is not passive, so no at-risk or passive activity limitation applies before § 461(l). Marcus's wages and the couple's taxable interest are not business gross income for this purpose. Elena's business gross income is $100,000 and her business deductions are $800,000, so the excess business loss is 800,000−(800,000 − (100,000 + $626,000) = $74,000. That $74,000 is disallowed for 2025 and is treated as an NOL carryover to 2026; the remaining $626,000 of the Schedule C loss is allowed. Choice A ignores the excess business loss limitation. Choice C applies the single-filer threshold of $313,000 instead of the joint threshold. Choice D reverses the allowed and carryover amounts.

Question 5

Beta Corporation, a calendar-year C corporation, has an $800,000 net operating loss carryover that arose in 2022. For 2025, before any NOL deduction, its taxable income is $500,000. No other limitations apply.

What are Beta's 2025 taxable income after the NOL deduction and its NOL carryover to 2026?

  1. Taxable income is $0; NOL carryover to 2026 is $300,000.
  2. Taxable income is $0; NOL carryover to 2026 is $400,000.
  3. Taxable income is $100,000; NOL carryover to 2026 is $300,000.
  4. Taxable income is $100,000; NOL carryover to 2026 is $400,000. (correct answer)
Explanation: IRC § 172(b)(2)(A) limits the NOL deduction for this post-2017 NOL to 80% of taxable income computed without regard to the NOL deduction. Beta's deduction is therefore 80% × $500,000 = $400,000, leaving 2025 taxable income of $100,000. The carryover to 2026 is $800,000 − $400,000 = $400,000. Under IRC § 172(b)(2)(C), a post-2017 NOL is carried forward indefinitely. Choice A deducts the full $500,000, ignoring the 80% limitation. Choice C uses the correct $400,000 deduction to compute taxable income but subtracts $500,000 from the carryover; the carryover must be reduced by the amount of the NOL deduction. Choice B is internally inconsistent: taxable income of $0 would require a $500,000 deduction, which would leave a $300,000 carryover, while a $400,000 carryover would follow only from a $400,000 deduction, which would leave taxable income of $100,000.

Question 6

ARC Manufacturing hired an employee in 2025 who was certified solely as a member of the Work Opportunity Tax Credit SNAP recipient target group (not a qualified veteran). The employee worked 300 hours and earned $4,800 in qualified first-year wages. ARC received the required certification and has sufficient income tax liability to use the full credit.

What amount of Work Opportunity Tax Credit may ARC Manufacturing claim for 2025?

  1. $1,920
  2. $0
  3. $1,500
  4. $1,200 (correct answer)
Explanation: IRC § 51 allows a Work Opportunity Tax Credit of 40% of qualified first-year wages for a target-group employee who completes at least 400 hours of service, but only 25% for an employee who completes at least 120 but fewer than 400 hours. This employee worked 300 hours, so the credit is 25% of the $4,800 of qualified first-year wages, or $1,200. Choice A applies the 40% rate even though the employee has not completed 400 hours. Choice C applies the 25% rate to the $6,000 statutory maximum wage base instead of the actual $4,800 of qualified wages. Choice B is incorrect because the employee satisfied the 120-hour threshold, so a credit is available.

Question 7

Luis, a single taxpayer, owned § 1244 stock in a qualifying small business corporation since 2018. In 2025 he sold all his stock for $9,000. He had paid $62,000 for the stock. He has no other capital gains or losses.

How is the $53,000 loss treated on Luis's 2025 return?

  1. $50,000 is an ordinary loss and $3,000 is a long-term capital loss. (correct answer)
  2. The entire $53,000 loss is an ordinary loss.
  3. The entire $53,000 loss is a long-term capital loss.
  4. $26,500 is an ordinary loss and $26,500 is a long-term capital loss.
Explanation: IRC § 1244(a) and (b) allow a single taxpayer to treat up to $50,000 of loss on qualifying small business corporation stock as an ordinary loss, rather than a capital loss. Luis's total loss is $53,000, so $50,000 is ordinary and the remaining $3,000 is treated as a capital loss. Because he held the stock for more than one year, the $3,000 excess is a long-term capital loss; with no other capital gains or losses, the $3,000 capital loss is deductible in 2025. Choice B exceeds the single-filer § 1244 limit. Choice C ignores § 1244 entirely. Choice D applies an arbitrary split rather than the statutory $50,000 limit.

Question 8

A single taxpayer's sole proprietorship incurred a net operating loss of $120,000 for 2025. For 2026, the taxpayer's taxable income, computed without regard to any net operating loss deduction, is $100,000. There are no other net operating loss carryovers or carrybacks available. What is the taxpayer's net operating loss deduction for 2026 and the carryover to 2027?

  1. Deduct $80,000 in 2026; a $20,000 carryover remains for 2027.
  2. Deduct $80,000 in 2026; a $40,000 carryover remains for 2027. (correct answer)
  3. Deduct $96,000 in 2026; a $24,000 carryover remains for 2027.
  4. Deduct $100,000 in 2026; a $20,000 carryover remains for 2027.
Explanation: IRC § 172(a)(2) and (b)(1)(A). For a net operating loss arising in a tax year beginning after December 31, 2017, the deduction in a carryover year is limited to 80% of taxable income computed without the NOL deduction. A 2025 NOL from a nonfarm sole proprietorship cannot be carried back and is carried forward indefinitely. The 2026 deduction is 80% × $100,000 = $80,000, and $120,000 − $80,000 = $40,000 carries forward to 2027. Choice B is correct. Choice A is wrong because it computes the carryover as $100,000 − $80,000 = $20,000, subtracting the deduction from taxable income instead of from the 120,000NOL.ChoiceCiswrongbecauseitappliesthe80120,000 NOL. Choice C is wrong because it applies the 80% limit to the NOL (120,000 × 80% = $96,000) instead of to taxable income. Choice D is wrong because it ignores the 80% limitation and deducts the full $100,000 of taxable income.

Question 9

Assume the eligible small business exception to the general business credit limitation does not apply. A taxpayer owns an interest in a partnership that conducts qualified research. For 2025, the taxpayer's share of the partnership's research credit is $50,000, and the taxpayer has no other credits and no prior-year unused credits. The taxpayer's regular tax liability for 2025 is $40,000, and the tentative minimum tax is $30,000. What amount of the general business credit may the taxpayer claim for 2025?

  1. $10,000 (correct answer)
  2. $36,250
  3. $40,000
  4. $50,000
Explanation: IRC § 38(c) limits the general business credit for the year to the excess of net income tax over the greater of (1) the tentative minimum tax or (2) 25% of the net regular tax liability above $25,000. Because the tentative minimum tax of $30,000 is less than the regular tax liability, no AMT is owed, and the net income tax is $40,000. The tentative minimum tax of 30,000isgreaterthan2530,000 is greater than 25% × (40,000 - $25,000) = $3,750, so the credit limitation is $40,000 - $30,000 = $10,000. The taxpayer may claim $10,000 of the $50,000 credit in 2025; the unused $40,000 is carried back one year and then forward 20 years under IRC § 39. The facts assume the eligible small business exception does not apply, so the standard § 38(c) limitation controls. Choice A (10,000)iscorrect.ChoiceB(10,000) is correct. Choice B (36,250) subtracts the 3,750253,750 25%-of-excess amount from net income tax instead of the greater tentative minimum tax; that result would be available under the eligible small business exception, which the facts exclude. Choice C (40,000) limits the credit by the regular tax liability but omits the tentative minimum tax from the limitation. Choice D ($50,000) claims the full credit and ignores the § 38(c) limitation.

Question 10

A single taxpayer, age 47, materially participates in all of her businesses. For 2025, she has W-2 wages of $210,000; a Schedule C net profit of $85,000; ordinary income of $45,000 from a general partnership interest; an ordinary loss of $680,000 from an S corporation in which she has sufficient stock basis and at-risk amounts; a $30,000 gain from the sale of equipment used in her Schedule C business; and a $12,000 long-term capital loss from the sale of stock held for investment. What is the amount of the taxpayer's excess business loss for 2025?

  1. $0
  2. $207,000 (correct answer)
  3. $219,000
  4. $367,000
Explanation: IRC § 461(l); Form 461 instructions. A noncorporate taxpayer's excess business loss is the excess of aggregate deductions attributable to trades or businesses over the sum of aggregate gross income or gain attributable to those trades or businesses plus the threshold amount, which is $313,000 for a single taxpayer in 2025. Under § 461(l)(3)(A), as amended by the CARES Act, the computation is made without regard to any deductions, gross income, or gains attributable to the trade or business of performing services as an employee, so the $210,000 of W-2 wages is excluded. Business income and gain is the $85,000 Schedule C profit + $45,000 partnership ordinary income + $30,000 gain on the business equipment = $160,000. The $12,000 capital loss on investment stock is not attributable to a trade or business and is excluded. The business deduction is the $680,000 S corporation loss. The excess business loss is 680,000−(680,000 - (160,000 + $313,000) = 207,000,whichisChoiceB.ChoiceA(207,000, which is Choice B. Choice A (0) counts the 210,000ofW−2wagesasbusinessincome,which§461(l)(3)(A)excludes.ChoiceC(210,000 of W-2 wages as business income, which § 461(l)(3)(A) excludes. Choice C (219,000) adds the 12,000investmentstocklosstothebusinessdeductions,althoughitisnotattributabletoatradeorbusiness.ChoiceD(12,000 investment stock loss to the business deductions, although it is not attributable to a trade or business. Choice D (367,000) compares the S corporation loss with the threshold alone and ignores the $160,000 of business income and gain that also offsets it.

Question 11

A single taxpayer, age 38, has a $150,000 net operating loss carryover to 2025 from a sole proprietorship that operated in 2024. For 2025, the taxpayer's adjusted gross income, before applying the net operating loss deduction, is 110,000(110,000 (50,000 of wages and $60,000 of net profit from a sole proprietorship). The taxpayer will claim the standard deduction of $15,750 and has no other deductions. What amount of the 2024 net operating loss carryover remains available to offset income in future years after applying the deduction for 2025?

  1. $18,850
  2. $55,750
  3. $62,000
  4. $74,600 (correct answer)
Explanation: IRC § 172 limits the deduction of a net operating loss carryover to 80% of taxable income computed without regard to the NOL deduction. The taxpayer's 2025 taxable income before the NOL deduction is $110,000 - $15,750 = $94,250. The NOL deduction is limited to 80% × $94,250 = $75,400, so the taxpayer uses $75,400 of the $150,000 carryover in 2025. The amount remaining to be carried forward is $150,000 - $75,400 = $74,600. Choice D (74,600)iscorrect.ChoiceA(74,600) is correct. Choice A (18,850) is the taxpayer's 2025 taxable income after the NOL deduction ($94,250 - 75,400),nottheremainingcarryover.ChoiceB(75,400), not the remaining carryover. Choice B (55,750) results from deducting the full 94,250oftaxableincomewithoutapplyingthe8094,250 of taxable income without applying the 80% limit (150,000 - 94,250).ChoiceC(94,250). Choice C (62,000) applies the 80% limit to adjusted gross income instead of taxable income, giving 80% × $110,000 = $88,000 and a remaining carryover of $150,000 - $88,000 = $62,000.

Question 12

A taxpayer contributes $50,000 cash to a general partnership that operates a manufacturing business, and she materially participates in the business. Her share of the partnership's liabilities consists of $80,000 of recourse debt for which she is personally liable and $70,000 of nonrecourse debt. Her adjusted basis in the partnership interest, which includes her share of all partnership liabilities, is $200,000. For 2025, the partnership allocates her a $150,000 ordinary business loss. What amount of the loss is deductible on her 2025 return, and how is the remainder treated?

  1. $150,000 is deductible because the loss does not exceed her $200,000 adjusted basis in the partnership interest.
  2. $50,000 is deductible; the remaining $100,000 is suspended until she contributes additional cash to the partnership.
  3. $130,000 is deductible; the remaining $20,000 is suspended and may be deducted in a later year when her at-risk amount increases. (correct answer)
  4. $120,000 is deductible; the remaining $30,000 is suspended because the recourse debt is not included in her at-risk amount.
Explanation: IRC § 465(a)–(b). A taxpayer may deduct a loss from an activity only to the extent of her amount at risk at the close of the taxable year. The at-risk amount includes cash contributed and recourse debt for which the taxpayer is personally liable, but excludes nonrecourse debt other than qualified nonrecourse financing secured by real property, which is not present here. Her at-risk amount is $50,000 + $80,000 = $130,000. The $150,000 loss does not exceed her $200,000 basis, so the section 704(d) limit does not bind; the at-risk limit of $130,000 is the binding cap. The disallowed $20,000 carries over and is deductible in a later year to the extent her at-risk amount increases. Choice C is correct. Choice A applies only the section 704(d) basis limit and ignores the separate at-risk limitation. Choice B excludes the $80,000 of recourse debt from the at-risk amount, but debt for which the taxpayer is personally liable counts as at risk. Choice D reverses the treatment of the two debts: the nonrecourse debt is not at risk in this manufacturing activity, while the recourse debt is.

Question 13

A single taxpayer has a $10,000 work opportunity tax credit arising in 2025. He has no other credits and no general business credit carryovers or carrybacks. His 2025 net income tax is $9,000, his net regular tax liability is $9,000, and his tentative minimum tax is $7,000. What amount of the work opportunity credit is allowed for 2025, and how is the unused credit treated?

  1. $9,000 is allowed; the unused $1,000 is carried forward for up to 20 years and may not be carried back.
  2. $7,000 is allowed; the unused $3,000 is carried back to 2024 and then forward for up to 20 years.
  3. $2,000 is allowed; the unused $8,000 is carried back to 2024 and then forward for up to 20 years.
  4. $9,000 is allowed; the unused $1,000 is carried back to 2024 and then forward for up to 20 years. (correct answer)
Explanation: IRC §§ 38(c) and 39(a). The general business credit is limited to the excess of net income tax over the greater of the tentative minimum tax or 25 percent of the net regular tax liability exceeding $25,000. The work opportunity credit is a specified credit under § 38(c)(4)(B), so for that credit the tentative minimum tax is treated as zero. The net regular tax liability of $9,000 does not exceed $25,000, so the 25 percent amount is also zero, and the limit is the full $9,000 of net income tax. The allowed credit is $9,000, and under § 39(a) the unused $1,000 is carried back one year to 2024 and, if not absorbed, forward for up to 20 years. Choice D is correct. Choice A states the correct limitation but denies the one-year carryback that § 39(a) grants. Choice B treats the $7,000 tentative minimum tax as the amount of the credit. Choice C applies the tentative minimum tax floor, which does not apply to a specified credit such as the work opportunity credit.

Question 14

A single taxpayer operates a sole proprietorship that earned $80,000 of net profit for 2025. He is also a general partner in a partnership that carries on a manufacturing business, and his allocable share of the partnership's ordinary business loss for 2025 is $450,000. He materially participates in both businesses, and his basis and at-risk amounts in the partnership are sufficient to support the loss. He has no other business income or losses for 2025. What amount of the excess business loss is disallowed for 2025, and how is it treated?

  1. $57,000 is disallowed; that amount is carried forward as a net operating loss to 2026. (correct answer)
  2. $57,000 is disallowed; that amount is forfeited because it exceeds the section 461(l) threshold.
  3. $313,000 is disallowed; the remaining $57,000 of the partnership loss is deductible for 2025.
  4. No amount is disallowed because the $370,000 net business loss does not exceed the $626,000 threshold for a single taxpayer.
Explanation: IRC § 461(l)(1)–(2). For 2025, a noncorporate taxpayer's excess business loss is the amount by which aggregate trade or business deductions exceed the sum of aggregate trade or business gross income plus the applicable threshold, which is 313,000forasingletaxpayer(313,000 for a single taxpayer (626,000 for married filing jointly). Here, the trades or businesses produce a net business loss of 370,000(370,000 (80,000 sole proprietorship profit offset by the $450,000 partnership loss). This $370,000 exceeds the $313,000 threshold by $57,000, so $57,000 is the excess business loss disallowed for 2025; after disallowance, the taxpayer's allowable net business loss for 2025 is $313,000. Under section 461(l)(2), the disallowed excess is treated as a net operating loss carryover to the following taxable year. Choice A is correct. Choice B misstates the treatment: the disallowed amount is carried forward as an NOL, not forfeited. Choice C reverses the amounts: $313,000 is the allowable net business loss, not the amount disallowed. Choice D applies the married-filing-jointly threshold of $626,000 to a single taxpayer; the single threshold is $313,000, and the $370,000 net business loss exceeds it by $57,000.