Deck 6: Losses and Loss Limitations

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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 7

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 8

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

Question 9

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 10

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 11

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

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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.

Question 21

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

Question 22

The purpose of the "excess business loss" rules are to limit the amount of non-business income e.g., salaries, interest, dividends, etc.) that can be "sheltered" from tax as a result of business losses.

Question 23

Beginning in 2018, a personal casualty loss deduction is only allowed for losses occurring in a Federally-declared disaster area.

Question 24

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

Question 25

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 26

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

Question 27

A net operating loss occurring in 2018 can only be carried forward no carryback exists).

Question 28

If a non-corporate taxpayer has an "excess business loss" for the year, it is not allowed.

Question 29

The excess business loss rule applies to partnerships and S corporations rather than partners and shareholders).

Question 30

In 2018, personal casualty gains are allowed to offset personal casualty losses.If an excess casualty loss results, it is not deductible unless attributable to a Federally-declared disaster).

Question 31

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 32

In 2017, 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 2018, 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 33

Losses on rental property are classified as deductions for AGI.

Question 34

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

Question 35

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 36

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 37

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

Question 38

Taxpayer's home was destroyed by a storm in the current year in a Federally-declared 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 39

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

Question 40

A net operating loss occurring in 2018 can only be carried forward and can offset no more than 80% of taxable income in a subsequent year.

Question 41

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

Question 42

Oriole Corporation has active income of $45,000 and a passive activity 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 43

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 44

A taxpayer can carry back any NOL incurred 2 years and then forward up to 20 years.

Question 45

Nonbusiness income for net operating loss purposes includes dividends received.

Question 46

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 activity loss.

Question 47

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 48

A theft of investment property can create or increase a net operating loss for an individual.

Question 49

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 50

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 activity loss.

Question 51

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive activity 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 52

Wolf Corporation has active income of $55,000 and a passive activity 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 53

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 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

Aram 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 56

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

Question 57

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

Question 58

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 59

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

Question 60

A taxpayer can carry an NOL forward indefinitely.

Question 61

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 62

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 63

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

Question 64

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

Question 65

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 activity loss.

Question 66

Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk.If the business incurs a loss of $80,000 from operations, Stuart will be allowed the full amount as a deduction.

Question 67

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

Question 68

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 69

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 70

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 71

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 72

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 73

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 74

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 75

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 76

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 77

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 78

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 activity loss can be deducted on Kim's final income tax return.

Question 79

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 80

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