Question 1

Last year,Abby loaned her friend,Pat,$10,000.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

D) 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 after determined totally worthless.

Question 2

Due to an unusual event,a taxpayer has a large loss in the current year,resulting in an NOL.The taxpayer expects next year's taxable income to return to the same approximate amount he reported in last few years,however he expects his income tax rate to decrease due to the recent election results.The taxpayer should elect to forego the carryback period.

Accepted Answer

If a taxpayer expects a lower marginal tax rate in the year following the NOL, he will prefer to carry back the loss.

Question 3

A net operating loss (NOL) occurs when taxable income for any year is negative because itemized deductions and total exemptions exceed business income.

Accepted Answer

A net operating loss generally involves only business income and expenses.

Question 4

Which of the following expenses or losses could create a net operating loss for an individual taxpayer?

Accepted Answer

B) Generally only business losses will allow the creation of an NOL.

Question 5

A taxpayer has low AGI this year,but unusually high itemized deductions.The one itemized deduction that is allowed to increase the NOL is

Accepted Answer

D) Nonbusiness itemized deductions are added back to the extent they exceed nonbusiness income. Only casualty losses on personal-use assets do not require addback.

Question 6

In October 2017,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 2018.Creditors are informed that no assets are available for payment.Jonathon Remodeling Co.will report

Accepted Answer

B) Since Jonathon Remodeling Co. is an accrual-basis taxpayer, the $30,000 is recognized in income when billed in 2017. The debt is a business bad debt since it is related to a trade or business. The nonpayment in 2018 results in a business bad debt which is an ordinary loss deductible in 2018.

Question 7

A taxpayer has generated a net operating loss in the current year and is weighing whether to carry back the NOL or elect to carry forward the NOL.The factors to consider in making this decision include all of the following except

Accepted Answer

D) The benefits of refundable credits would be available without regard to the loss, but the other factors noted are relevant.

Question 8

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

A) 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 9

An individual taxpayer has negative taxable income for the year.In calculating the net operating loss created,which of the following expenses or losses will be added back to the negative taxable income?

Accepted Answer

D) The NOL is due to business losses so all of the above will be added back in the computation of the NOL.

Question 10

Martha,an accrual-method taxpayer,has an accounting practice.In 2016,she performs tax analyses for Arnold and sends him an invoice for $10,000.In 2017,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

C) 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 11

Frank loaned Emma $5,000 in 2015 with the agreement that the loan would be repaid in three years.In 2016,Emma filed for bankruptcy and,based on available information from the bankruptcy court,it was estimated that Frank could expect to receive $.65 on the dollar.In 2017,final settlement was made and Frank received $600.
a.Assuming the loan is a business bad debt,what is the amount of and the nature of Frank's deduction in 2016?
b.Assuming the loan is a business bad debt,what is the amount of and the nature of Frank's deduction in 2017?
c.Assuming instead that the loan is a nonbusiness bad debt,what is the amount of and the nature of Frank's deduction in 2016 and 2017?

Accepted Answer

The answer of Frank loaned Emma $5,000 in 2015 with...

Question 12

Harley,a single individual,provided you with the following information for this year:
Income:
  
Deductions:
  
What is the amount of Harley's net operating loss for this year?

Accepted Answer

The answer of Harley,a single individual,provided you with the following...

Question 13

Kayla reported the following amounts in her 2017 tax return:

Kayla has generated an NOL of

Accepted Answer

D)
 11ea7e84_1f04_ea1a_9a0a_f5d150734f40_TB1260_00

Question 14

A taxpayer's home is destroyed by fire,resulting in a large casualty loss deduction exceeding the taxpayer's income.The taxpayer will be allowed to carry back and then carry forward a net operating loss due to this personal loss.

Accepted Answer

While most personal deductions are added back in calculating the NOL, personal casualty loss deductions are not.

Question 15

What are some factors which indicate that a debt may be worthless?

Accepted Answer

The answer of What are some factors which indicate that...

Question 16

A net operating loss can be carried back three years or carried forward five years.

Accepted Answer

The relevant period is two-year carryback and 20-year carryforward.

Question 17

If a loan has been made to a related party,what are some considerations for determining whether the loan is a bona fide debt or is,in fact,merely a gift?

Accepted Answer

The answer of If a loan has been made to...

Question 18

A taxpayer incurs a net operating loss in the current year.With respect to the application of the NOL,

Accepted Answer

D) The normal application period for utilizing the NOL is carry back two years and then carry forward for up to 20 years, but the taxpayer does have the option to forego the carryback period.

Question 19

In 2016,Grace loaned her friend Paula $12,000 to invest in various stocks.Paula signed a note to repay the principal with interest.Unfortunately the market for that industry sector plunged,and Paula incurred large losses.In 2017,Paula declared personal bankruptcy and Grace was unable to collect any of her loan.Grace had no other gains or losses last year or this year.The result is

Accepted Answer

C) The debt is a nonbusiness bad debt since it is not related to Grace's trade or business. Therefore, the $12,000 loss is treated as a short-term capital loss, $3,000 of which is deductible this year and $9,000 of which may be carried over to next year.

Question 20

Distinguish between the accrual-method taxpayer and the cash-method taxpayer with regard to basis in a receivable.

Accepted Answer

The answer of Distinguish between the accrual-method taxpayer and the...

Quiz 8: Losses and Bad Debts