Deck 7: Deductions and Losses: Certain Business Expenses and Losses

Question 1

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

Answer 1

False

Question 2

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 2

False

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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 10

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 11

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

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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 17

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

Question 18

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 19

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

Question 20

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

Question 21

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 22

A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.

Question 23

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

Question 24

If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized deduction.

Question 25

A personal casualty loss deduction may be allowed for losses resulting from termites.

Question 26

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

Question 27

The limit for the domestic production activities deduction (DPAD) uses all W-2 wages paid to employees by the taxpayer during the tax year.

Question 28

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

Question 29

If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction in 2014 because of the taxable income limitation, the product of the amount not allowed multiplied by 9% can be carried over for 5 years.

Question 30

A father cannot claim a loss on his daughter's rental use property.

Question 31

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 32

For tax years beginning in 2014, the domestic production activities deduction (DPAD) for a sole proprietor is calculated by multiplying 9% times adjusted gross income.

Question 33

Research and experimental expenditures do not include the cost of consumer surveys.

Question 34

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 35

Losses on rental property are classified as deductions for AGI.

Question 36

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 37

If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project if less than 60 months.

Question 38

When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10% of adjusted gross income for the first year.

Question 39

The cost of depreciable property is not a research and experimental expenditure.

Question 40

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 41

A farming NOL may be carried back 2 years.

Question 42

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 43

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 44

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 45

On September 3, 2013, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2013, the stock was worth $85,000. On August 15, 2014, Able was notified that the stock was worthless. How should Able report this item on his 2014 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.

Question 46

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 47

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2014. 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 48

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

Question 49

In 2014, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $42,000 AGI for the year before considering the casualty.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Fair Market Value} \quad\quad \text {Insurance}$
$\begin{array}{rrrrr}\text { Asset } & \text { Adjusted Basis } & \text { Before } & \text { After }&\text { Recovery }\\ \hline\text { A } & \$ 9,200 & \$ 8,000 & \$ 1,000 & \$ 2,000 \\\text { B } & 3,000 & 4,000 & -0- & 4,000 \\\text { C } & 3,700 & 1,700 & -0 -& 900\end{array}$

Wally's casualty loss deduction is:

A) $1,500.
B) $1,600.
C) $4,800.
D) $58,000.
E) None of the above.

Question 50

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 51

John files a return as a single taxpayer. In 2014, 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 2014.

A) ($5,000).
B) $0.
C) $45,000.
D) $51,000.
E) None of the above.

Question 52

In 2014, Grant's personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows:
Cost basis $280,000
Value before casualty 250,000
Value after casualty -0-
What is Grant's allowable casualty loss deduction?

A) $0.
B) $6,500.
C) $6,900.
D) $10,000.
E) $80,000.

Question 53

The amount of a farming loss cannot exceed the amount of the taxpayer's NOL for the taxable year.

Question 54

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 55

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 56

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 judgment. Jed was able to collect the judgment 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 57

On June 2, 2013, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000. Fred's TV Sales uses the accrual method. In 2014, 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 2015, final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2015?

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

Question 58

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.

A) $27,000.
B) $38,000.
C) $42,000.
D) $47,000.
E) None of the above.

Question 59

On February 20, 2013, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2014, the stock became worthless. During 2014, 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 2014 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 60

Jim had a car accident in 2014 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 61

Mike, single, age 31, had the following items for 2014:

$\begin{array}{lr}\text { Salary } & \$ 50,000 \\\text { Nonbusiness bad debt } & (6,000) \\\text { Casualties —indenendent events }\\\text { Asset A (personal use property held for two years) — gain } & 3,000 \\\text { Securities (stolen) -loss } & (8,000 )\\\text { Dividends } & 2,000 \\\text { nterest expense on personal residence } & 10,000 \\\text { Compute Mike's taxable income for } 2014 &\end{array}$

Question 62

Jose, single, had the following items for 2014:
Salary $44,000
§ 1244 loss on stock acquired 3 years ago (70,000)
§ 1244 gain on stock acquired 10 months ago 26,000
Worthless security purchased in June of last year (4,000)
Nonbusiness bad debt (7,000)
Interest income 8,000
Compute Jose's adjusted gross income for 2014.

Question 63

In 2013, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah's insurance company told her that her policy did not cover the theft. Sarah's other itemized deductions last year were $2,000. She had AGI of $30,000 last year. In August of 2014, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during 2014.

A) None of the $5,000 should be included in gross income.
B) $2,900 should be included in gross income.
C) $5,000 should be included in gross income.
D) Last year's return should be amended to include the $5,000.
E) None of the above.

Question 64

In 2013, Robin Corporation incurred the following expenditures in connection with the development of a new product:

In 2014, Robin incurred the following additional expenditures in connection with the development of the product:

In October 2014, Robin began receiving benefits from the project. If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction.

Question 65

In 2014, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:
$\begin{array}{llr} \text { Loss from damage to rental property } &(\$6,000)\\ \text { Loss from theft of bonds } &(3,000)\\ \text {Personal casualty gain } &4,000\\ \text {Personal casualty loss (after \( \$ 100 \) floor) } &(9,000)\\\end{array}$

Determine the amount of Morley's itemized deduction from the losses.

A) $0.
B) $2,900.
C) $5,120.
D) $5,600.
E) None of the above.

Question 66

In 2014, Theo, an employee, had a salary of $30,000 and experienced the following losses:
$\begin{array}{lr}\text {Loss from damage to rental property }&(\$10,000)\\\text {Unreimbursed loss from theft of business }&(5,000)\\\text {Personal casualty gain }&4,000\\\text {Personal casualty loss (after \( \$ 100 \) floor) }&(9,000)\\\end{array}$

Determine the amount of Theo's itemized deduction from these losses.

A) $0.
B) $2,800.
C) $2,900.
D) $4,580.
E) None of the above.

Question 67

Susan has the following items for 2014:
-Loss on rental property caused by termites-$110,000. Insurance covered 80% of the loss.
-Loss on personal use automobile-$10,000. The insurance policy does not cover the first $3,000 of loss. Susan decided not to file a claim for the loss.
-Loss on a painting stolen from Susan's house. Susan purchased the painting three years ago as an investment. She paid $40,000 for the painting and it was worth $35,000 at the time of the theft. The painting was insured for the fair market value.
-Salary-$40,000.
Determine Susan's AGI and total amount of itemized deductions for 2014.

Question 68

While Susan was on vacation during the current year, someone broke into her home and stole the following items:
-A computer used 60% in connection with Susan's employment as an employee and 40% for her personal use. The cost of the computer was $8,000. Depreciation of $3,000 had been taken on the computer and it had a fair market value of $4,000 at the time of the theft.
-A painting, which Susan purchased as an investment for $10,000, had a fair market value of $17,000.
-Silverware purchased for $3,000 had a fair market value of $5,000.
∙ Cash of $30,000.
Susan's adjusted gross income, before considering any of the above items, is $60,000. Determine the total amount of Susan's itemized deductions resulting from the theft.

Question 69

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 70

Maria, who is single, had the following items for 2014:
$\begin{array}{llr} \text { Salary} &\$80,000\\ \text { Loss on sale of \( \S 1244 \) small business stock acquired 3 years ago } &(60,000)\\ \text { Stock acquired 2 years ago became worthless during the year } &(5,000)\\ \text { Long-term capital gain } &25,000\\ \text { Nonbusiness bad debt } &(15,000)\\ \text { Casualty loss on property held 6 months } &(6,000)\\ \text {Casualty gain on property held 4 years } &4,000\\ \text {Determine Maria's adiusted gross income for 2014 . } &\\\end{array}$

Question 71

Regarding research and experimental expenditures, which of the following are not qualified expenditures?

A) Costs of ordinary testing of materials.
B) Costs to develop a plant process.
C) Costs of developing a formula.
D) Depreciation on a building used for research.
E) All of the above are qualified expenditures.

Question 72

John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows:
$\begin{array}{ll}\text { Cost basis } & \$ 260,000 \\\text { Value before the fire } & 400,000 \\\text { Value after the fire } & 100,000 \\\text { Insurance recovery } & 270,000\end{array}$
John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:
$\begin{array}{lr}\text { Cost basis } & \$ 80,000 \\\text { Value before the accident } & 56,000 \\\text { Value after the accident } & 20,000 \\\text { Insurance recovery } & 18,000\end{array}$
What is John's itemized casualty loss deduction?

A) $0.
B) $2,000.
C) $17,000.
D) $18,000.
E) None of the above.

Question 73

In 2014, Mary had the following items:
$\begin{array}{lr}\text { Salary } & \$ 30,000 \\\text { Personal use casualty gain } & 10,000 \\\text { Personal use casualty loss (after } \$ 100 \text { floor) } & 17,000 \\\text { Other itemized deductions } & 4,000\end{array}$
Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2014.

A) $13,000.
B) $14,100.
C) $14,300.
D) $22,000.
E) None of the above.

Question 74

Julie, who is single, has the following items for 2014:
∙ Salary-$100,000.
-A hurricane completely destroyed Julie's duplex during the current year. Julie lived in one-half of the duplex and rented out the other half. Julie paid $400,000 for the duplex and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex was worth $420,000 at the time of the destruction. Julie's insurance policy paid her 90% of the fair market value of the duplex.
-Household items destroyed in the hurricane had a basis of $15,000 and a fair market value of $8,500. There was no insurance recovery on the household items.
-Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the painting was worth $10,000. Julie purchased the painting as an investment with the intent that she would sell it when its value exceeded $12,000. There was no insurance recovery on the painting.
-Julie had an automobile accident in the current year. Julie used the car 100% for personal purposes. The car cost $37,000 and had a decline in FMV as a result of the accident of $5,000. The car was insured, but the policy had a $2,000 deductible clause. Julie chose not to file a claim for the damage.
-Julie owned a computer that she used 100% for business. The computer was also completely destroyed in the hurricane. It had a basis of $6,000 and a FMV of $4,000 at the time it was destroyed. Julie was not reimbursed by her employer for the loss on the computer.
-Home mortgage interest-$10,000.
Determine the amount of Julie's taxable income for 2014.

Question 75

Juanita, single and age 43, had the following items for 2014:

Compute Juanita's taxable income for 2014.

Question 76

For the year 2014, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber's DPAD for 2014 is:

A) $54,000.
B) $57,600.
C) $58,000.
D) $79,200.
E) None of the above.

Question 77

Last year, Green Corporation incurred the following expenditures in the development of a new plant process:
$\begin{array}{lr}\text { Salaries } & \$ 250,000 \\\text { Materials } & 90,000 \\\text { Utilities } & 20,000 \\\text { Quality control testing costs } & 40,000 \\\text { Management study costs } & 5,000 \\\text { Depreciation of equipment } & 15,000\end{array}$
During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.

A) $48,000.
B) $50,400.
C) $54,667.
D) $57,067.
E) None of the above.

Question 78

Blue Corporation incurred the following expenses in connection with the development of a new product:
$\begin{array}{lr}\text { Salaries } & \$ 100,000 \\\text { Utilities } & 18,000 \\\text { Materials } & 25,000 \\\text { Advertising } & 5,000 \\\text { Market survey } & 3,000 \\\text { Depreciation on machine } & 9,000\end{array}$
Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year.

A) $0.
B) $118,000.
C) $143,000.
D) $152,000.
E) $160,000.

Question 79

Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in 2014. Ivory's domestic production activities deduction is:

A) $36,000.
B) $42,000.
C) $54,000.
D) $63,000.
E) None of the above.

Question 80

In 2014, Tan Corporation incurred the following expenditures in connection with the development of a new product:

Tan began selling the product in November 2014. If Tan elects to amortize research and experimental expenditures, determine Tan's deduction for 2014.