Question 1

A bona fide debtor-creditor relationship can never exist in the case of related parties.

Accepted Answer

A bona fide debtor-creditor relationship can exist between related parties, but it can be harder to substantiate.

Question 2

Daniel's cabin was destroyed in a massive tornado in 2015. After consideration of insurance, he has a loss of $15,000. The President of the United States has declared the area a disaster area. Daniel can deduct this loss in

Accepted Answer

When a taxpayer incurs a casualty loss in an area declared a disaster area by the President, he can elect to deduct the loss in the year the loss occurs or in the preceding year's tax return.

Question 3

A taxpayer uses an allowance method (i.e. aging method) of calculating bad debt expense for purposes of the business' financial statements. For income tax purposes, she will also use the allowance method to calculate the bad debt deduction.

Accepted Answer

A taxpayer must generally use the specific identification method for bad debt deductions.

Question 4

Martha, an accrual-method taxpayer, has an accounting practice. In 2014, she performs tax analyses for Arnold and sends him an invoice for $10,000. In 2015, Martha sells her practice and all accounts to David. Arnold's debt becomes worthless that year after David has purchased the practice. The result is

Accepted Answer

Since David acquired the account upon acquiring the business, he is entitled to a business bad debt deduction because the debt was incurred in the trade or business in which David is currently engaged.

Question 5

Juanita, who is single, is in an automobile accident in 2015 and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Juanita does not expect to recover any of the loss from her insurance company. Juanita's 2015 AGI is $31,000, and she deducts a $3,000 loss on her 2015 tax return. Her other itemized deductions in 2015 exceed $12,000. In 2016, Juanita's insurance company reimburses her $2,800. Juanita's 2016 AGI is $28,000. As a result, Juanita must

Accepted Answer

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Question 6

Constance, who is single, is in an automobile accident in 2015, and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Constance does not expect to recover any of the loss from her insurance company. Constance's 2015 AGI is $31,000. Her casualty loss is $3,000; she has other itemized deductions of $1,200. In 2016, Constance's insurance company reimburses her $2,800. Constance's 2016 AGI is $28,000. As a result, Constance must

Accepted Answer

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Question 7

Determine the net deductible casualty loss on the Schedule A for Alan Michael when his adjusted gross income was $40,000 in 2015 and the following occurred:  A and B were destroyed in the same casualty in March. C was destroyed in a separate casualty in July.
All casualty losses were nonbusiness personal use property losses and none occurred in a federally declared disaster area.
What is the amount of the net deductible casualty loss?

Accepted Answer

The answer of Determine the net deductible casualty loss on...

Question 8

No deduction is allowed for a partially worthless nonbusiness debt.

Accepted Answer

A taxpayer cannot deduct a loss for a nonbusiness debt that is still partially recoverable during the year.

Question 9

Vera has a key supplier for her business who was facing cash flow problems which would impair Vera's ability to get shipments of key components for her production. Vera made a $10,000 loan to the supplier. Unfortunately the supplier filed for bankruptcy and has gone out of business without repaying Vera. Vera will be able to recognize a loss of

Accepted Answer

The motivation for the loan is to assist the functioning of Vera's business so it will be considered a business bad debt. An ordinary loss of the full amount will be allowed.

Question 10

For a bad debt to be deductible, the taxpayer must have a basis in the debt.

Accepted Answer

There is no deduction for a bad debt if the taxpayer has no basis in a receivable.

Question 11

Taj operates a sole proprietorship, maintaining the business records under the cash-basis method of accounting. Taj performs services for a client and sends the client a bill for $12,000. Six months later, before payment is received by Taj, the client files bankruptcy, with no assets available for unsecured creditors such as Taj. Taj will deduct

Accepted Answer

As a cash-basis taxpayer, Taj has no basis in the receivable.

Question 12

In October 2015, Jonathon Remodeling Co., an accrual-method taxpayer, remodels and renovates an office building for Dale and bills him $30,000. Dale signs a note for the debt. Dale keeps delaying payment and files bankruptcy in 2016. Creditors are informed that no assets are available for payment. Jonathon Remodeling Co. will report

Accepted Answer

Since Jonathon Remodeling Co. is an accrual-basis taxpayer, the $30,000 is recognized in income when billed in 2015. The debt is a business bad debt since it is related to a trade or business. The nonpayment in 2016 results in a business bad debt which is an ordinary loss deductible in 2016.

Question 13

A taxpayer guarantees another person's obligation and is forced to pay the debt under the terms of the guarantee. The original debtor does not repay the taxpayer. The taxpayer/guarantor may deduct the loss.

Accepted Answer

If the payment of the debt was not intended as a gift, the guarantor may deduct the loss.

Question 14

A business bad debt gives rise to an ordinary deduction while a nonbusiness bad debt is treated as a short-term capital loss.

Accepted Answer

Individuals deduct nonbusiness bad debt as a short-term capital loss regardless of the outstanding period.

Question 15

This summer, Rick's home (which has a basis of $80,000) is damaged by a tornado. An appraisal by a realtor placed the FMV of the home at $120,000 before the tornado and at $85,000 after the tornado. Rick estimates that the insurance company will reimburse him for 60% of the loss. Next year, the insurance company pays Rick $20,000. Rick's current year's AGI is $50,000 and his next year's AGI is $55,000. Rick suffers no other casualty losses in either year. After limitations, Rick may deduct a casualty loss this year of

Accepted Answer

Where partial recovery is expected in a subsequent year, the loss may be deducted in the year of the casualty for the estimated unrecovered amount. Lesser of adjusted basis or loss in value [($120,000 - $85,000) - $21,000 anticipated insurance recovery - $100 floor - $5,000 AGI =$8,900]. Anticipated recovery is 60% × $35,000 = $21,000.

Question 16

In February 2015, Amelia's home, which originally cost $150,000, is damaged by a windstorm. Amelia had refinanced the home shortly before the storm, and it was appraised at $200,000. After the storm, the home appraised at $120,000. Amelia has received no insurance reimbursement by December 31, but expects to recover 90 percent of the loss. In the subsequent year, the insurance company pays Amelia $50,000. Amelia's AGI is $85,000 in 2015, and her 2016 AGI is $80,000. Amelia suffers no other casualty losses in either year. Amelia may deduct

Accepted Answer

Loss deducted in 2015 and 2016: 11eac5e3_b0a6_c987_a396_cfd7ebedd335_TB5639_00

Question 17

Lisa loans her friend, Grace, $10,000 to finance a new business. If Grace defaults on the loan, Lisa may take a deduction for a business bad debt in the year of total worthlessness.

Accepted Answer

In order to be classified as a business bad debt, the debt must be related to the taxpayer's trade or business. See "Typical Misconception."

Question 18

Last year, Abby loaned Pat $10,000 as a gesture of their friendship. Although Pat had signed a note payable that contained interest payments and a maturity date, the loan had not been repaid this year when Pat died insolvent. For this year, assuming that the loan was bona fide, Abby should account for nonpayment of the loan as a(n)

Accepted Answer

Because the debt is not related to Abby's trade or business, it is a nonbusiness bad debt. All nonbusiness bad debts are deductible as short-term capital losses.

Question 19

What is or are the standards that must be present to warrant a casualty loss deduction?

Accepted Answer

The answer of What is or are the standards that...

Question 20

A taxpayer suffers a casualty loss on personal-use property for which he has insurance coverage. However, to avoid a premium adjustment, the taxpayer fails to make a timely claim. In this situation is the full deduction for the casualty, after the normal floors, available to the taxpayer? Why or why not?

Accepted Answer

The answer of A taxpayer suffers a casualty loss on...

Quiz 8: Losses and Bad Debts