Deck 6: Losses and Loss Limitations

Question 1

Last year,taxpayer had a $10,000 nonbusiness bad debt.Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000.If taxpayer collects the entire $10,000 during the current year,$8,000 needs to be included in gross income.

Answer 1

False

Question 2

The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.

Answer 2

False

Question 3

In determining whether a debt is a business or nonbusiness bad debt,the debtor's use of the borrowed funds is important.

Answer 3

False

Question 4

A loss is not allowed for a security that declines in value.

Question 5

A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency.

Question 6

An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.

Question 7

A bona fide debt cannot arise on a loan between father and son.

Question 8

A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.

Question 9

A loss from a worthless security is always treated as a short-term capital loss.

Question 10

A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.

Question 11

James is in the business of debt collection.He purchased a $20,000 account receivable from Green Corporation for $15,000.During the year,James collected $17,000 in final settlement of the account.James can take a $2,000 bad debt deduction in the current year.

Question 12

"Other casualty" means casualties similar to those associated with fires,storms,or shipwrecks.

Question 13

If a business debt previously deducted as partially worthless becomes totally worthless this year,only the amount not previously deducted can be deducted this year.

Question 14

If an account receivable written off during a prior year is subsequently collected during the current year,the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year.

Question 15

A business bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless.

Question 16

If a taxpayer sells their § 1244 stock at a loss,all of the loss will be ordinary loss.

Question 17

A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.

Question 18

A bond held by an investor that is uncollectible will be treated as a worthless security and hence,produce a capital loss.

Question 19

Al,who is single,has a gain of $40,000 on the sale of § 1244 stock (small business stock)and a loss of $80,000 on the sale of § 1244 stock.As a result,Al has a $40,000 ordinary loss.

Question 20

Several years ago,John purchased 2,000 shares of Red Corporation § 1244 stock from Mark for $40,000.Last year,John sold one-half of his Red Corporation stock to Mike for $12,000.During the current year,John sold the remaining Red Corporation stock for $3,000.John has a $17,000 ($3,000 - $20,000)ordinary loss for the current year.

Question 21

Jack owns a 10% interest in a partnership (not real estate)in which his at-risk amount is $42,000 at the beginning of the year.During the year,the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations.Jack's at-risk amount at the end of the year is $44,000.

Question 22

Judy owns a 20% interest in a partnership (not real estate)in which her at-risk amount was $35,000 at the beginning of the year.The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year.Her at-risk amount at the end of the year is $43,000.

Question 23

A taxpayer can carry any NOL incurred forward up to 20 years.

Question 24

If investment property is stolen,the amount of the loss is the adjusted basis of the property at the time of the theft reduced by $100 and 10% of AGI.

Question 25

Last year,Amos had AGI of $50,000.Amos also had a diamond ring stolen which cost $20,000 and was worth $17,000 at the time of the theft.He itemized deductions on last year's tax return.In the current year,Amos recovered $17,000 from the insurance company.Therefore,he must include $11,900 in gross income on the tax return for the current year.

Question 26

The current position of the IRS is that a personal casualty loss deduction is not allowed for losses resulting from termites.

Question 27

Jackson Company incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Jackson is a personal service corporation,it may deduct $34,000 of the passive loss.

Question 28

In the current year,Don has a $55,000 loss from a business he owns.His at-risk amount at the end of the year,prior to considering the current year loss,is $36,000.He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business.

Question 29

Kelly,who earns a yearly salary of $120,000,sold an activity with a suspended passive loss of $44,000.The activity was sold at a loss and Kelly has no other passive activities.The suspended loss is not deductible.

Question 30

If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than it's adjusted basis,a gain is recognized.

Question 31

Taxpayer's home was destroyed by a storm in the current year and the area was declared a disaster area.If the taxpayer elects to treat the loss as having occurred in the prior year,it will be subject to the 10%-of-AGI reduction based on the AGI of the current year.

Question 32

Oriole Corporation has active income of $45,000 and a passive loss of $23,000 in the current year.Under an exception,Oriole can deduct the $23,000 loss if it is a personal service corporation.

Question 33

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

Question 34

Gray Company,a closely held C corporation,incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Gray is not a personal service corporation,it may deduct $34,000 of the passive loss.

Question 35

The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.

Question 36

The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer.

Question 37

Tonya owns an interest in an activity (not real estate)that converted recourse financing to nonrecourse financing.Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Question 38

A theft loss is taken in the year of the theft.

Question 39

The amount of loss for partial destruction of business property is the decline in fair market value of the business property.

Question 40

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk.If the business incurs a loss from operations during the year and her share of the loss is $32,000,this loss will be fully deductible.

Question 41

Joyce owns an activity (not real estate)in which she participates for 100 hours a year;her husband participates for 450 hours.Joyce qualifies as a material participant.

Question 42

If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort,any loss from that activity is treated as an active loss that can offset active income.

Question 43

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

Question 44

Nathan owns Activity A,which produces income,and Activity B,which produces passive losses.From a tax planning perspective,Nathan will be better off if Activity A is passive.

Question 45

Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective,Linda will be better off if Activity A is not passive.

Question 46

Tom participates for 300 hours in Activity A and 250 hours in Activity B,both of which are nonrental businesses.Both activities are active.

Question 47

Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.

Question 48

A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity.

Question 49

When determining whether an individual is a material participant,participation by an owner's spouse generally counts.

Question 50

Individuals can deduct from active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

Question 51

Wolf Corporation has active income of $55,000 and a passive loss of $33,000 in the current year.Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

Question 52

A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.

Question 53

In the current year,Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner.If she is an active participant and if her modified AGI is $100,000,she can deduct $25,000 of the loss.

Question 54

Dick participates in an activity for 90 hours during the year.He has no employees and there are no other participants.Dick is a material participant.

Question 55

Wayne owns a small apartment building that produces a $45,000 loss during the year.His AGI before considering the rental loss is $85,000.Because Wayne is an active participant with respect to the rental activity,he may deduct the $45,000 loss.

Question 56

Bruce owns a small apartment building that produces a $25,000 loss during the year.His AGI before considering the rental loss is $85,000.Bruce must be a material participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.

Question 57

Tom participates for 100 hours in Activity A and 450 hours in Activity B,both of which are nonrental businesses.Both activities are active.

Question 58

Mary Jane participates for 100 hours during the year in an activity she owns.She has no employees and is the only participant in the activity.The activity is a significant participation activity.

Question 59

Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

Question 60

From January through November,Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest.The partnership has four full-time employees.During December,Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards.Vern qualifies as a material participant.

Question 61

On June 2,2014,Fred's TV Sales sold Mark a large HD TV,on account,for $12,000.Fred's TV Sales uses the accrual method.In 2015,when the balance on the account was $8,000,Mark filed for bankruptcy.Fred was notified that he could not expect to receive any of the amount owed to him.In 2016,final settlement was made and Fred received $1,000.How much bad debt loss can Fred deduct in 2016?

A) $0
B) $7,000
C) $8,000
D) $12,000
E) None of the above

Question 62

On February 20,2014,Bill purchased stock in Pink Corporation (the stock is not small business stock)for $1,000.On May 1,2015,the stock became worthless.During 2015,Bill also had an $8,000 loss on § 1244 small business stock purchased two years ago,a $9,000 loss on a nonbusiness bad debt,and a $5,000 long-term capital gain.How should Bill treat these items on his 2015 tax return?

A) $4,000 long-term capital loss and $9,000 short-term capital loss.
B) $4,000 long-term capital loss and $3,000 short-term capital loss.
C) $8,000 ordinary loss and $3,000 short-term capital loss.
D) $8,000 ordinary loss and $5,000 short-term capital loss.
E) $8,000 long-term capital loss and $6,000 short-term capital loss.

Question 63

If a taxpayer has a net operating loss (NOL)in 2015 of $20,000,of which $8,000 is attributable to a theft of rental use property,the taxpayer may:

A) Carry all of the NOL of $20,000 back 5 years.
B) Carry all of the NOL of $20,000 back 3 years.
C) Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years.
D) All of the above.
E) None of the above.

Question 64

Which of the following events would produce a deductible loss?

A) Erosion of personal use land due to rain or wind.
B) Termite infestation of a personal residence over a several year period.
C) Damages to personal automobile resulting from a taxpayer's willful negligence.
D) A misplaced diamond ring.
E) None of the above.

Question 65

Two years ago,Gina loaned Tom $50,000.Tom signed a note the terms of which called for monthly payments of $2,000 plus 6% interest on the outstanding balance.Last year,when the balance owing on the loan was $18,000,Tom defaulted on the note.As of the end of last year,there appeared to be no reasonable prospect of Gina recovering the $18,000.As a consequence,Gina claimed the $18,000 as a nonbusiness bad debt.Last year,Gina had AGI of a negative $6,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends.Gina did not itemize her deductions.During the current year,Tom paid Gina $13,000 in final settlement of the loan.How should Gina account for the payment in the current year?

A) File an amended tax return for last year.
B) Report no income for the current year.
C) Report $8,000 of income for the current year.
D) Report $12,000 of income for the current year.
E) None of the above.

Question 66

On July 20,2014,Matt (who files a joint return)purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock)for $24,000.On November 10,2014,Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000.On September 15,2015,Matt sold the 4,000 shares of stock for $120,000.How should Matt treat the sale of the stock on his 2015 return?

A) $54,000 ordinary loss.
B) $100,000 ordinary loss;$46,000 net capital gain.
C) $100,000 ordinary loss;$20,000 STCL.
D) $130,000 ordinary loss;$66,000 LTCG.
E) None of the above.

Question 67

Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year.Her modified AGI is $125,000 from an active business.Disregarding any at-risk amount limitation,she may deduct $25,000 of the loss,and the remaining $25,000 is a suspended passive loss.

Question 68

Three years ago,Sharon loaned her sister $30,000 to buy a car.A note was issued for the loan with the provision for monthly payments of principal and interest.Last year,Sharon purchased a car from the same dealer,Hank's Auto.As partial payment for the car,the dealer accepted the note from Sharon's sister.At the time Sharon purchased the car,the note had a balance of $18,000.During the current year,Sharon's sister died.Hank's Auto was notified that no further payments on the note would be received.At the time of the notification,the note had a balance due of $15,500.What is the amount of loss,with respect to the note,that Hank's Auto may claim on the current year tax return?

A) $0
B) $3,000
C) $15,500
D) $18,000
E) None of the above

Question 69

Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year.He has AGI of $150,000 from an active business.He may deduct $25,000 of the loss.

Question 70

Five years ago,Tom loaned his son John $20,000 to start a business.A note was executed with an interest rate of 8%,which is the Federal rate.The note required monthly payments of the interest with the $20,000 due at the end of ten years.John always made the interest payments until last year.During the current year,John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800.Tom is an accrual basis taxpayer whose only income is salary and interest income.The proper treatment for the nonpayment of the note is:

A) No deduction.
B) $3,000 deduction.
C) $20,000 deduction.
D) $21,800 deduction.
E) None of the above.

Question 71

Jed is an electrician.Jed and his wife are accrual basis taxpayers and file a joint return.Jed wired a new house for Alison and billed her $15,000.Alison paid Jed $10,000 and refused to pay the remainder of the bill,claiming the fee to be exorbitant.Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement.Jed was able to collect the judgement but not the remainder of the bill from Alison.What amount of loss may Jed deduct in the current year?

A) $0
B) $2,000
C) $3,000
D) $5,000
E) None of the above

Question 72

Chris receives a gift of a passive activity from his father whose basis was $60,000.Suspended losses related to the activity are $18,000.Chris will be allowed to offset the $18,000 suspended losses against future passive income.

Question 73

Last year,Lucy purchased a $100,000 account receivable for $90,000.During the current year,Lucy collected $97,000 on the account.What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected.

A) $0
B) $2,000 gain
C) $3,000 loss
D) $13,000 loss
E) None of the above

Question 74

Norm's car,which he uses 100% for personal purposes,was completely destroyed in an accident in 2015.The car's adjusted basis at the time of the accident was $13,000.Its fair market value was $10,000.The car was covered by a $2,000 deductible insurance policy.Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates.His adjusted gross income was $14,000 (before considering the loss).What is Norm's deductible loss?

A) $0
B) $100
C) $500
D) $9,500
E) None of the above

Question 75

Alma is in the business of dairy farming.During the year,one of her barns was completely destroyed by fire.The adjusted basis of the barn was $90,000.The fair market value of the barn before the fire was $75,000.The barn was insured for 95% of its fair market value,and Alma recovered this amount under the insurance policy.Alma has adjusted gross income for the year of $40,000 (before considering the casualty).Determine the amount of loss she can deduct on her tax return for the current year.

A) $3,750
B) $14,650
C) $14,750
D) $18,750
E) None of the above

Question 76

Kim dies owning a passive activity with a basis of $75,000,a fair market value of $140,000,and suspended losses of $80,000.All of the $80,000 passive loss can be deducted on Kim's final income tax return.

Question 77

Mary incurred a $20,000 nonbusiness bad debt last year.She also had an $8,000 long-term capital gain last year.Her taxable income for last year was an NOL of $15,000.During the current year,she unexpectedly collected $12,000 on the debt.How should Mary account for the collection?

A) $0 income
B) $8,000 income
C) $11,000 income
D) $12,000 income
E) None of the above

Question 78

Peggy is in the business of factoring accounts receivable.Last year,she purchased a $30,000 account receivable for $25,000.This year,the account was settled for $25,000.How much loss can Peggy deduct and in which year?

A) $5,000 for the current year.
B) $5,000 for the prior year and $5,000 for the current year.
C) $5,000 for the prior year.
D) $10,000 for the current year.
E) None of the above.

Question 79

Jim had a car accident in 2015 in which his car was completely destroyed.At the time of the accident,the car had a fair market value of $30,000 and an adjusted basis of $40,000.Jim used the car 100% of the time for business use.Jim received an insurance recovery of 70% of the value of the car at the time of the accident.If Jim's AGI for the year is $60,000,determine his deductible loss on the car.

A) $900
B) $2,900
C) $3,000
D) $9,000
E) None of the above

Question 80

On September 3,2014,Able,a single individual,purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31,2014,the stock was worth $85,000.On August 15,2015,Able was notified that the stock was worthless.How should Able report this item on his 2015 tax return?

A) $85,000 capital loss.
B) $85,000 ordinary loss.
C) $50,000 ordinary loss and $35,000 capital loss.
D) $60,000 ordinary loss.
E) None of the above.