SEE - Special Enrollment Exam Quiz: Planning And Carryovers
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Planning And CarryoversQuestion 1 of 13

Omar owns a limited partnership interest in a passive activity. At the time of the December 2025 sale, the activity has $48,000 of suspended passive losses allocable to Omar. In December 2025, Omar sells his entire interest in the activity to his brother for cash. The sale is otherwise a fully taxable transaction, and Omar has no other passive activities.

How are the $48,000 of suspended passive losses treated on Omar's 2025 federal income tax return?

The $48,000 is allowed in full in 2025 because Omar disposed of his entire interest in the activity in a fully taxable transaction.
The $48,000 is not allowed in 2025 because the sale is to a related party; the suspended losses continue to be subject to the passive activity loss rules.
The $48,000 is allowed in 2025 only to the extent of the gain recognized on the sale, and the balance is permanently disallowed.
The $48,000 is not allowed in 2025 and becomes a capital loss carryover that may be used against capital gains in future years.
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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Planning And Carryovers

Practice Planning And Carryovers 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

Omar owns a limited partnership interest in a passive activity. At the time of the December 2025 sale, the activity has $48,000 of suspended passive losses allocable to Omar. In December 2025, Omar sells his entire interest in the activity to his brother for cash. The sale is otherwise a fully taxable transaction, and Omar has no other passive activities.

How are the $48,000 of suspended passive losses treated on Omar's 2025 federal income tax return?

  1. The $48,000 is allowed in full in 2025 because Omar disposed of his entire interest in the activity in a fully taxable transaction.
  2. The $48,000 is not allowed in 2025 because the sale is to a related party; the suspended losses continue to be subject to the passive activity loss rules. (correct answer)
  3. The $48,000 is allowed in 2025 only to the extent of the gain recognized on the sale, and the balance is permanently disallowed.
  4. The $48,000 is not allowed in 2025 and becomes a capital loss carryover that may be used against capital gains in future years.
Explanation: IRC § 469(g) generally allows suspended passive losses when a taxpayer disposes of the entire interest in a passive activity in a fully taxable transaction. Under the related-party exception to that rule, a transfer to a related party is not treated as a disposition for this purpose; a brother is a related party under IRC § 267(b) and (c)(4). Therefore the suspended losses are not allowed in 2025 and remain subject to the passive activity loss rules, with possible allowance when the related party later disposes of the interest to an unrelated party. Choice A ignores the related-party exception. Choice C misstates the treatment on a related-party sale and incorrectly adds a permanent disallowance. Choice D mischaracterizes suspended passive losses as capital loss carryovers; the transfer does not recharacterize them.

Question 2

A taxpayer has $120,000 of wages and has been a limited partner in a rental activity for six years. The taxpayer does not materially participate and has sufficient adjusted basis and amount at risk. The activity has generated $74,000 of suspended passive losses that have been carried forward. In 2025, the taxpayer sells the entire partnership interest to an unrelated buyer in a fully taxable transaction and recognizes a $10,000 gain. The taxpayer has no other passive activities.

What is the correct treatment of the $74,000 of suspended passive losses for 2025?

  1. The full $74,000 is deductible in 2025 because the entire interest was disposed of in a fully taxable transaction to an unrelated person, and the losses are no longer treated as passive. (correct answer)
  2. Only $10,000 of the suspended losses is deductible in 2025; the remaining $64,000 remains suspended because gains on disposition can be offset only by current-year losses from the same activity.
  3. The full $74,000 is deductible in 2025, but it is deductible only as a miscellaneous itemized deduction, because passive activity losses are not trade or business losses.
  4. The $74,000 remains suspended until the taxpayer has future passive income because the taxpayer did not materially participate in the year of sale.
Explanation: IRC § 469(g)(1). Choice A is correct. Suspended passive losses from an activity become deductible when the taxpayer disposes of the taxpayer's entire interest in the activity in a fully taxable transaction to an unrelated person. The losses are then treated as not from a passive activity, so they may offset nonpassive income such as wages without a passive-income source. Choice B misstates the release as limited to the disposition gain; Choice C treats the released loss as an itemized deduction, but passive losses are not itemized deductions; Choice D imposes a material-participation condition that § 469(g) does not require for a complete taxable disposition.

Question 3

A taxpayer paid AMT in earlier years because of deferral preferences arising from incentive stock option exercises. The taxpayer has an $80,000 minimum tax credit carryforward. For 2025, the taxpayer is not subject to AMT; regular tax before credits is $28,000 and tentative minimum tax is $12,000. No other nonrefundable credits affect the calculation.

What is the correct treatment of the minimum tax credit on the 2025 return?

  1. No minimum tax credit is allowed because the taxpayer is not subject to AMT in 2025; the credit must be saved for a year in which the taxpayer again owes AMT.
  2. $16,000 of the credit is allowed, and the remaining $64,000 carries forward for no more than 20 years after the year in which the AMT was paid.
  3. $16,000 of the credit is allowed, and the remaining $64,000 carries forward indefinitely to future tax years. (correct answer)
  4. $28,000 of the credit is allowed, eliminating the regular tax, and the remaining $52,000 is refundable.
Explanation: IRC § 53(c). Choice C is correct. The minimum tax credit is allowed to the extent regular tax liability exceeds tentative minimum tax, here $28,000 minus $12,000, or $16,000. The credit does not require a current-year AMT liability and cannot reduce regular tax below tentative minimum tax; unused minimum tax credit carries forward indefinitely. Choice A confuses the purpose of the credit; Choice B applies the general business credit's 20-year limit; Choice D ignores the tentative minimum tax floor and treats the credit as refundable.

Question 4

A taxpayer has a $12,000 general business credit carryforward from a 2005 credit that will expire if not used in 2025. The taxpayer also has a $20,000 general business credit arising in 2025. The general business credit limitation for 2025 is $25,000, and the taxpayer has no other carryovers or carrybacks.

How much of the 2005 credit carryforward may be claimed on the 2025 return?

  1. $12,000, because general business credit carryforwards are treated as used before current-year credits and the limitation is not prorated. (correct answer)
  2. $9,375, because the $25,000 limitation is allocated pro rata between the $12,000 carryforward and the $20,000 current-year credit.
  3. $5,000, because the current-year credit is used before any carryforward and only $5,000 of the carryforward remains after the current-year credit is allowed.
  4. $0, because the 20-year carryforward period for the 2005 credit ended before 2025.
Explanation: IRC §§ 38(a) and 39(a). Choice A is correct. The general business credit for the tax year is the sum of carryforwards, current-year credits, and carrybacks, and carryforwards, which IRC § 38(a) lists first, are used before current-year credits. The 2005 credit is in its 20th and final carryover year under IRC § 39(a), so the $25,000 limitation is applied first to the $12,000 carryforward, and all $12,000 is allowable for 2025. That leaves $13,000 of the limitation for the $20,000 current-year credit; the remaining $7,000 may be carried back or forward under the general carryover rules. Choice B incorrectly prorates the limitation between the carryforward and the current-year credit. Choice C reverses the statutory ordering. Choice D miscounts the carryforward period, because a 2005 unused credit may be carried through 2025.

Question 5

For 2025, a married couple filing jointly has $700,000 of wages and taxable interest. The husband operates a sole proprietorship that he materially participates in and has sufficient basis and amount at risk. After all Schedule C deductions, the business has a net loss of $850,000. The couple has no other business income or loss. For 2025, the excess business loss threshold for a joint return is $626,000.

What is the correct treatment of the business loss on the 2025 return?

  1. The full $850,000 is deductible in 2025 because the couple has $700,000 of nonbusiness income to absorb the loss.
  2. $626,000 is deductible in 2025; the remaining $224,000 is permanently disallowed by the excess business loss rule.
  3. $700,000 is deductible in 2025, the amount needed to reduce taxable income to zero, and the remaining $150,000 becomes a net operating loss carryover to 2026.
  4. $626,000 is deductible in 2025; the remaining $224,000 is treated as a net operating loss carryover to 2026. (correct answer)
Explanation: IRC §§ 172, 461(l). Choice D is correct. For 2025, a noncorporate taxpayer's excess business loss is the amount by which business deductions exceed the sum of business gross income plus the $626,000 MFJ threshold. Thus, $224,000 of the $850,000 loss is an excess business loss; it is not deductible in 2025 and is treated as a net operating loss carryover to 2026. The remaining $626,000 business loss is allowed against the couple's nonbusiness income. Choice A ignores the § 461(l) threshold; Choice B treats a statutory carryover as permanently lost; Choice C caps the allowed deduction by nonbusiness income, which § 461(l) does not do.

Question 6

In 2025, a taxpayer paid $12,000 of foreign income taxes on general-category foreign-source business income. The 2025 foreign tax credit limitation for that category is $8,000, and the taxpayer had no excess general-category limitation in 2024, so none of the unused credit can be carried back. On the 2026 return, the taxpayer's only foreign-source income is passive-category income, and the tentative US tax on that income is more than $12,000.

Which of the following is correct regarding the $4,000 unused 2025 foreign tax credit?

  1. It may be credited in 2026 because unused foreign tax credits can offset US tax on any foreign-source income within the ten-year carryforward period.
  2. It cannot be credited in 2026 because passive-category income is not eligible for foreign tax credits after the TCJA separate-category rules.
  3. It may be credited in 2026 only if the taxpayer also has general-category foreign-source income, because carryovers stay in the same separate category. (correct answer)
  4. It must be allocated between general-category and passive-category income in 2026 on the basis of gross income before any credit is allowed.
Explanation: IRC §§ 904(c), 904(d). Choice C is correct. An unused foreign tax credit is carried back one year and forward ten years, and with no 2024 room the $4,000 is carried forward. The foreign tax credit is computed separately for separate limitation categories, and an unused credit carryover keeps the category of the taxes that created it. The $4,000 general-category carryover cannot be applied to 2026 tax on passive-category income, even though the overall limitation for that year is large enough. Choice A ignores the separate-category rule; Choice B incorrectly denies all foreign tax credits on passive-category income; Choice D invents a gross-income allocation rule that does not govern carryover application.

Question 7

Monifa, a single taxpayer, owns a limited partnership interest that is a passive activity to her. The activity has $48,000 of suspended losses from prior years. In 2025, she sells her entire interest in a fully taxable transaction to an unrelated buyer and recognizes a $12,000 gain. She has $150,000 of wages and no income or loss from any other passive activity. What amount of the suspended loss is treated as not from a passive activity and may be used to offset her wage income?

  1. $0
  2. $12,000
  3. $36,000 (correct answer)
  4. $48,000
Explanation: IRC § 469(g)(1) provides that when a taxpayer disposes of the taxpayer's entire interest in a passive activity in a fully taxable transaction, the suspended losses from that activity are released. The excess of the $48,000 suspended losses over the $12,000 recognized gain is $36,000, and that excess is treated as a loss not from a passive activity, so it may offset Monifa's wage income. The remaining $12,000 is allowed as a passive activity loss against the 12,000dispositiongain.ChoiceA(12,000 disposition gain. Choice A (0) ignores the disposition rule and treats the suspended losses as remaining suspended. Choice B (12,000)treatsonlythegain−equivalentamountasavailableagainstwages,butthatportionisallowedasapassivelossagainstthegain.ChoiceD(12,000) treats only the gain-equivalent amount as available against wages, but that portion is allowed as a passive loss against the gain. Choice D (48,000) treats the entire suspended loss as nonpassive, overlooking the statutory reduction for the recognized gain.

Question 8

Rosa, a single taxpayer, operates a consulting business as a sole proprietor. For 2025, the business had gross income of $250,000 and business deductions of $600,000, and no other item enters the excess business loss calculation. She also had $500,000 of interest and dividend income and no prior-year loss carryovers. What amount of the business loss is treated as an NOL carryover to 2026?

  1. $0
  2. $37,000 (correct answer)
  3. $313,000
  4. $350,000
Explanation: IRC § 461(l) limits the current-year deduction of an excess business loss. For 2025, the excess business loss threshold for a single taxpayer is $313,000. Rosa's aggregate business deductions are $600,000 and her aggregate business gross income is $250,000, so the excess is 600,000−(600,000 − (250,000 + $313,000) = $37,000. That $37,000 is disallowed for 2025 and is treated as an NOL carryover to 2026; the remaining 313,000businesslossisallowedin2025.ChoiceA(313,000 business loss is allowed in 2025. Choice A (0) ignores the excess business loss threshold and would allow the entire 350,000losscurrently.ChoiceC(350,000 loss currently. Choice C (313,000) is the amount of business loss allowed in 2025, not the carryover. Choice D ($350,000) is the total business loss before applying § 461(l) and treats the whole loss as the carryover.

Question 9

Ava owns a general partnership interest in an activity conducted for profit. She materially participates in the activity. At the beginning of 2025, her adjusted basis in the partnership interest is $46,000, but her at-risk amount in the activity is only $18,000. Her allocable share of the partnership's 2025 loss is $46,000. She makes no additional contributions and receives no distributions during 2025.

How is Ava's $46,000 allocable loss treated on her 2025 federal income tax return?

  1. Ava may deduct $18,000 in 2025; the remaining $28,000 is carried forward and may be deducted in a later year when her at-risk amount increases sufficiently. (correct answer)
  2. The full $46,000 loss is deductible in 2025 because her adjusted basis in the partnership interest is greater than zero and she is a general partner.
  3. Ava may deduct $18,000 in 2025, but the remaining $28,000 is permanently disallowed because at-risk losses cannot be carried to another tax year.
  4. Ava may deduct $18,000 in 2025, and the remaining $28,000 is treated as a short-term capital loss carryover to 2026.
Explanation: IRC § 465(a)(1) limits a loss from an activity to the amount the taxpayer has at risk. Ava's at-risk amount is only $18,000, so only $18,000 of the $46,000 loss is allowable in 2025. Under IRC § 465(a)(2), the $28,000 disallowed loss is treated as a deduction attributable to the same activity in the next taxable year, so it carries forward and is allowed when her at-risk amount is sufficient. Choice B ignores the at-risk limit and relies only on basis and general-partner status. Choice C misstates the carryover rule as a permanent disallowance. Choice D mischaracterizes the suspended loss as a capital loss carryover; it remains a suspended loss from the activity, not a capital loss carryover.

Question 10

Priya had a $10,000 short-term capital loss carryover from 2024 to 2025. In 2025, her only capital transaction was a $10,000 long-term capital gain on the sale of stock held for more than one year. She has no other capital gains or losses.

Which statement is correct regarding the treatment of the carryover on Priya's 2025 return?

  1. The $10,000 short-term loss carryover cannot be used in 2025 because a short-term capital loss carryover may be used only against short-term capital gains.
  2. The $10,000 short-term loss carryover remains available for 2026 because it cannot be used in a year with no current-year short-term capital gains.
  3. The $10,000 short-term loss carryover is netted with the $10,000 long-term capital gain, so Priya reports no net capital gain or loss for 2025 and has no capital loss carryover to 2026. (correct answer)
  4. The $10,000 short-term loss carryover is recharacterized as a long-term capital loss and is fully absorbed by the $10,000 long-term capital gain.
Explanation: IRC § 1212(b) treats a short-term capital loss carryover as a short-term capital loss in the carryover year. Under the capital gain and loss netting rules of IRC § 1222, the $10,000 net short-term capital loss is combined with the $10,000 net long-term capital gain, leaving no net capital gain or loss for 2025 and no amount to carry to 2026. Choice A misstates the rule: a short-term loss carryover is not confined to offsetting short-term gains because the netting process allows it to absorb net long-term gain. Choice B incorrectly imposes a same-character current-year gain requirement. Choice D misstates the character; the carryover is not recharacterized as long-term.

Question 11

A married couple filing jointly has $700,000 of W-2 wages in 2025. The wife's sole proprietorship, which is engaged in for profit, has no gross receipts and $700,000 of deductible expenses for 2025. The couple has no other business income, gains, or business deductions for 2025.

What is the correct treatment of the $700,000 Schedule C loss on their 2025 federal income tax return?

  1. The full $700,000 Schedule C loss is allowed in 2025, and no part of the loss is carried over to 2026 as a net operating loss.
  2. The $387,000 excess business loss is disallowed for 2025 and is carried over to 2026 as a net operating loss carryover; the remaining $313,000 of the loss is allowed.
  3. The $74,000 excess business loss is disallowed for 2025 and is carried over to 2026 as a net operating loss carryover; the remaining $626,000 of the loss is allowed. (correct answer)
  4. A $74,000 excess business loss is disallowed and must first be carried back to the earliest year in the two-year carryback period before any amount can be carried forward.
Explanation: Under IRC § 461(l), the excess business loss of a noncorporate taxpayer is the amount by which aggregate business deductions exceed aggregate business income plus the applicable threshold. For married filing jointly in 2025, the threshold is $626,000. The business deductions are $700,000 and business income is $0; the couple's W-2 wages are not business income for this purpose because the definition excludes the trade or business of performing services as an employee. The excess business loss is therefore $74,000. That amount is disallowed and, under IRC § 461(l)(2), is treated as an NOL carryover to 2026; the remaining $626,000 of the loss is allowed for 2025. Choice A ignores the excess business loss limitation. Choice B misstates the threshold: it applies the $313,000 unmarried/MFS threshold, producing a $387,000 excess, but the $626,000 MFJ threshold controls. Choice D misstates the NOL carryback rule; this 2025 business loss generally cannot be carried back, and the excess is carried to 2026.

Question 12

In 2024, a taxpayer who itemized deductions contributed appreciated stock held more than one year to a public charity. The contribution was limited by the special AGI percentage limit for capital gain property, and the excess was carried over to 2025. In 2025, the taxpayer again itemized deductions, made additional cash contributions to a public charity, and again had a charitable deduction limited by the AGI percentage caps.

How must the taxpayer compute the 2025 charitable contribution deduction?

  1. Treat the stock carryover as a cash contribution in 2025 so it can be deducted under the more favorable cash-contribution limit, because the character of a contribution is redetermined in the carryover year.
  2. Deduct the 2025 cash contributions first and then the stock carryover; the carryover remains subject to the capital gain property percentage limit and may be carried over until used or the carryover period expires. (correct answer)
  3. Deduct the stock carryover first, because a carryover from an earlier year must be used before current-year contributions in the later year or the carryover expires.
  4. Use only the stock carryover in 2025 if the 2025 cash contributions already exceed the AGI limit; any current-year cash contributions not deductible in 2025 are permanently lost.
Explanation: IRC §§ 170(b)(1), 170(d)(1). Choice B is correct. A charitable contribution carryover is allowed in the later year after all contributions actually made in that later year are deducted. The carryover also keeps the limitation category of the original contribution, so a carryover of appreciated capital gain property remains subject to the capital gain property percentage limit. Choice A wrongly recharacterizes the carryover as a cash contribution; Choice C reverses the required ordering and falsely suggests the carryover is forfeited; Choice D misstates the treatment of unused current-year cash contributions to a public charity, which would begin their own carryover rather than be permanently lost.

Question 13

In 2024, Marta made a cash contribution to a qualified public charity. After applying the 2024 contribution limit, she had a $30,000 charitable contribution carryover to 2025. In 2025 she itemizes deductions and makes a $10,000 cash contribution to the same charity. Marta's maximum charitable contribution deduction for 2025, after applying the applicable percentage limit, is $25,000. She has no other charitable contributions.

What amount of the 2024 charitable contribution carryover, if any, remains available after 2025?

  1. $5,000
  2. $20,000
  3. $30,000
  4. $15,000 (correct answer)
Explanation: Under IRC § 170(d)(1), a charitable contribution carryover may be used in the five succeeding tax years, and current-year contributions are deducted before the carryover is applied to the remaining limit. Marta's $10,000 current-year contribution uses $10,000 of the $25,000 limit, leaving $15,000 of the limit to absorb the carryover. She therefore uses $15,000 of the $30,000 carryover in 2025 and $15,000 remains available, making Choice D correct. Choice A results from applying the entire $25,000 limit to the carryover and ignoring the current-year contribution. Choice B results from incorrectly subtracting the $10,000 current-year contribution from the $30,000 carryover instead of applying the remaining limit to the carryover. Choice C ignores the fact that $15,000 of the carryover is used in 2025.