Question 1

Gloria owns and works full-time at a shop that rents watercraft of various types to tourists who are vacationing at the beach.If she generates a loss from that activity, the loss is subject to the passive activity loss rules because it is rental property.

Accepted Answer

Gloria's activity is not considered passive because she materially participates in the operation of her business, which is a key exception to the passive activity loss rules, even though it involves rental property.

Question 2

On September 3, 2018, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31, 2018, the stock was worth $85,000.On August 15, 2019, Able was notified that the stock was worthless.How should Able report this item on his 2019 tax return?

Accepted Answer

The answer of On September 3, 2018, Able, a single...

Question 3

On July 20, 2018, 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, 2018, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000.On September 15, 2019, Matt sold the 4,000 shares of stock for $120,000.How should Matt treat the sale of the stock on his 2019 return?

Accepted Answer

The answer of On July 20, 2018, Matt (who files...

Question 4

Jim had a car accident in 2019 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.He 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.

Accepted Answer

Jim's deductible loss is calculated based on the lesser of the adjusted basis or the decrease in fair market value, minus any insurance recovery. Since the car was used 100% for business, the personal loss limitations do not apply. The decrease in fair market value is $30,000 (the value of the car at the time of the accident), and the adjusted basis is $40,000. The insurance recovery is 70% of $30,000, which is $21,000. The loss before insurance recovery is the lesser of the adjusted basis or the fair market value decrease, which is $30,000. Subtracting the insurance recovery ($21,000) from this amount gives a loss of $9,000. However, because the insurance covered most of the loss, and the calculation based on the given options does not lead to any of the provided answers directly without considering specific tax rules or exceptions not provided in the question, the correct choice is to indicate that none of the provided options correctly represents the deductible loss based on the standard calculation method. This suggests a need for more specific tax advice or a review of additional tax rules not covered in the question.

Question 5

Bruce, who is single, had the following items for the current year: ∙ Salary of $80,000. ∙ Gain of $20,000 on the sale of § 1244 stock acquired two years earlier. ∙ Loss of $75,000 on the sale of § 1244 stock acquired three years earlier. ∙ Worthless stock of $15,000.The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year. Determine Bruce's AGI for the current year.

Accepted Answer

The answer of Bruce, who is single, had the following...

Question 6

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?

Accepted Answer

Hank's Auto can claim a loss of $15,500 on the current year tax return, which is the balance due on the note at the time they were notified no further payments would be received. This is because the note became worthless when Sharon's sister died and it was clear the remaining balance would not be paid.

Question 7

On February 20, 2018, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000.On May 1, 2019, the stock became worthless.During 2019, 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 2019 tax return?

Accepted Answer

The worthlessness of stock in a corporation that is not small business stock is treated as a capital loss, which in this case is $1,000. The $8,000 loss on § 1244 small business stock is treated as an ordinary loss. The $9,000 loss on a nonbusiness bad debt is also treated as an ordinary loss. The $5,000 long-term capital gain is netted against the $1,000 capital loss to result in a net capital gain of $4,000. Therefore, the correct choice is C, which is $8,000 ordinary loss and $3,000 short-term capital loss ($9,000 + $1,000 - $5,000 = $5,000 capital loss; $5,000 - $2,000 (maximum annual capital loss deduction) = $3,000 short-term capital loss).

Question 8

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

Accepted Answer

If Activity B is a passive activity, its losses may only offset passive income, not active income from Activity A, limiting Anita's immediate tax benefits.

Question 9

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.

Accepted Answer

The answer of Last year, Lucy purchased a $100,000 account...

Question 10

Which of the following events would produce a deductible loss in 2019?

Accepted Answer

In 2019, the tax law in the United States allowed for deductible losses only in the case of federally declared disasters. Events such as erosion, termite infestation, damages due to willful negligence, or losing personal property like a diamond ring do not qualify for a deductible loss unless they are directly related to a federally declared disaster.

Question 11

Jed is an electrician.He 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?

Accepted Answer

The answer of Jed is an electrician.He and his wife...

Question 12

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?

Accepted Answer

The answer of Peggy is in the business of factoring...

Question 13

John files a return as a single taxpayer.In 2019, he had the following items: ∙ Salary of $40,000. ∙ Loss of $65,000 on the sale of § 1244 stock acquired two years ago. ∙ Interest income of $6,000. Determine John's AGI for 2019.

Accepted Answer

The answer of John files a return as a single...

Question 14

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 $50,000, which included $16,000 of net long-term capital gains.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?

Accepted Answer

The answer of Two years ago, Gina loaned Tom $50,000.Tom...

Question 15

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 10 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:

Accepted Answer

The answer of Five years ago, Tom loaned his son...

Question 16

Jennifer gave her interest in a passive activity (fair market value of $75,000 and basis of $60,000) to Harrison. Associated with the interest is a suspended passive activity loss of $8,000.Upon making the gift, the suspended passive activity loss is not deductible to Jennifer, but it will benefit Harrison.

Accepted Answer

This is because the passive activity loss is suspended at the individual level, and is carried forward until the individual has passive income or disposes of the entire passive activity. Since Jennifer has disposed of her entire interest in the passive activity, the suspended loss is transferred to Harrison along with the interest. Harrison can use the suspended loss to offset future passive activity income or gain from the activity.

Question 17

In 2019, Wally had the following insured personal casualty losses (arising from one casualty in a Federally declared disaster area).Wally also had $42,000 AGI for the year before considering the casualty.  Wally's casualty loss deduction is:

Accepted Answer

The answer of In 2019, Wally had the following insured...

Question 18

Kathy, who is a real estate professional, owns an apartment building and devotes 550 hours to managing the activity. All losses from the rental activity will be considered nonpassive and deductible against active income.

Accepted Answer

The answer of Kathy, who is a real estate professional,...

Question 19

Joyce, an architect, earns $100,000 from her practice in the current year.In addition, she receives $35,000 in dividends, capital gains, and annuity income during the year.Further, she incurs a loss of $35,000 from an investment in a passive activity.Joyce's AGI for the year after considering the passive investment is $100,000.

Accepted Answer

Joyce's AGI would be $100,000 (earned income) + $35,000 (dividends, capital gains, and annuity income) - $35,000 (passive activity loss) = $100,000. Therefore, the correct answer is B, not A.

Question 20

Mary incurred a $20,000 nonbusiness bad debt last year.She also had an $18,000 long-term capital gain last year. Her taxable income for last year was $25,000.During the current year, she unexpectedly collected $12,000 on the debt.How should Mary account for the collection?

Accepted Answer

Nonbusiness bad debts are treated as short-term capital losses when they become worthless. If Mary unexpectedly recovers part of the debt, the recovery is reported as income up to the amount deducted in the previous year. Since she had a $20,000 bad debt and recovered $12,000, she must report the entire $12,000 as income.

Quiz 6: Losses and Loss Limitations