Deck 8: Losses and Bad Debts

Question 1

A taxpayer may deduct suspended losses of a passive activity when the taxpayer completely terminates his or her ownership of the activity.

Answer 1

True

Question 2

The total worthlessness of a security generally results in an ordinary loss.

Answer 2

False

Question 3

Losses incurred in the sale or exchange of personal-use property are deductible as capital losses.

Answer 3

False

Question 4

A capital loss may arise from the sale or exchange of a capital asset.

Question 5

One of the requirements which must be met for stock to be considered Section 1244 stock is that the stock must be owned by an individual or a partnership.

Question 6

If a taxpayer disposes of an interest in a passive activity, unused carryover losses are available to the purchaser of the interest.

Question 7

Partnerships and S corporations must identify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

Question 8

One of the requirements which must be met for stock to be considered Section 1244 stock is that the corporation cannot have more than $10 million of total capital and paid in surplus as of the stock issuance.

Question 9

The destruction of a capital asset by a casualty gives rise to a capital rather than ordinary loss.

Question 10

Once an activity has been classified as passive, it is considered passive with regard to that taxpayer until it is sold.

Question 11

Individual taxpayers can offset portfolio income with passive losses.

Question 12

In order to be recognized and deducted on a tax return, a loss must first be realized.

Question 13

Losses from passive activities that cannot be deducted currently are carried over for up to 5 subsequent years.

Question 14

Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules.

Question 15

When applying the limitations of the passive activity rules, a taxpayer's AGI is classified into active income, portfolio income and passive income. For this purpose, portfolio income includes dividends, interest, annuities, and royalties.

Question 16

The sale of inventory at a loss results in an ordinary loss.

Question 17

A loss on business or investment property which is abandoned is deductible as an ordinary loss to the extent of the property's adjusted basis on the date of abandonment.

Question 18

A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.

Question 19

The amount of loss realized on the sale of property is computed by subtracting adjusted basis from amount realized.

Question 20

A loss incurred on the sale or exchange of property is deductible only if the property is used in a trade or business or held for investment.

Question 21

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.

Question 22

Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.

Question 23

When the taxpayer anticipates a full recovery on a casualty loss of personal-use property but receives less than full recovery in a subsequent year, the unrecovered portion may be deducted.

Question 24

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

Question 25

No deduction is allowed for a partially worthless nonbusiness debt.

Question 26

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

Question 27

When business property involved in a casualty is totally destroyed, the amount of the loss is limited to the lesser of the taxpayer's adjusted basis in the property or the reduction in FMV.

Question 28

For purposes of applying the passive loss limitations for rental real estate, active participation requires a greater time commitment by the taxpayer than does material participation.

Question 29

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.

Question 30

Individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses, subject to AGI limitations.

Question 31

Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

Question 32

In the case of casualty losses of personal-use property, the losses sustained in each separate casualty are reduced by both $100 and 10 percent of the taxpayer's AGI for the year.

Question 33

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

Question 34

A theft loss is deducted in the year in which the theft is discovered.

Question 35

A taxpayer may deduct a loss resulting from the theft of business and investment property but not a theft of personal-use property.

Question 36

When personal-use property is covered by insurance, no deduction is available for a casualty loss of the property unless the taxpayer timely files an insurance claim for the loss.

Question 37

For purposes of the application of the passive loss limitations, a closely held C corporation is a C corporation where more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

Question 38

A closely held C Corporation's passive losses may offset its active income.

Question 39

If a taxpayer suffers a loss attributable to a disaster in an area subsequently declared a disaster area, the casualty loss may be deducted in the year preceding the year in which the loss actually occurs.

Question 40

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

Question 41

Stacy, who is married and sole shareholder of ABC Corporation, sold all of her stock in the corporation for $100,000. Stacy had organized the corporation in 2009 by contributing $225,000 and receiving all of the capital stock of the corporation. ABC Corporation is a domestic corporation engaged in the manufacturing of ski boots. The stock in ABC Corporation qualified as Sec. 1244 stock. The sale results in a(n)

A)ordinary loss of $125,000.
B)long-term capital loss of $125,000.
C)long-term capital loss of $100,000 and ordinary loss of $25,000.
D)ordinary loss of $100,000 and long-term capital loss of $25,000.

Question 42

Joy reports the following income and loss: Activities A, B, and C are all passive activities.
Based on this information, Joy has

A)adjusted gross income of $90,000.
B)salary of $120,000 and deductible net losses of $30,000.
C)salary of $120,000 and net passive losses of $30,000 that will be carried over.
D)salary of $120,000, passive income of $60,000, and passive loss carryovers of $90,000.

Question 43

Jana reports the following income and loss: Activities A, B, and C are all passive activities.
Based on this information, Joy has the following suspended losses:

A)
B)
C)
D)

Question 44

Jorge owns activity X which produced a $20,000 passive loss last year. Jorge's only income last year was wages of $30,000. Jorge is a material participant in activity X this year when it produces a $14,000 loss. This year, Jorge's wages are $40,000. This year, Jorge also has passive activity income from activity Y of $16,000. What is the total passive activity loss carryover to next year?

A)$0
B)$3,000
C)$4,000
D)$18,000

Question 45

All of the following losses are deductible except

A)decline in value of securities.
B)total worthlessness of securities.
C)sale or exchange of business property.
D)destruction of personal use property by fire, storm, or casualty.

Question 46

In 2000, Michael purchased land for $100,000. Over the years, economic conditions deteriorated, and the value of the land declined to $60,000. Michael sells the property in this year, when it is subject to a $30,000 nonrecourse mortgage. The buyer pays Michael $34,000 cash and takes the property subject to the mortgage. Michael incurs $5,000 in real estate commissions. Michael's gain or loss on the sale is

A)$4,000 gain.
B)$1,000 loss.
C)$36,000 loss.
D)$41,000 loss.

Question 47

Jeff owned one passive activity. Jeff sold the activity and realized a $2,000 gain on the sale. Prior to the sale, he realized a current year loss from the activity of $6,000. In addition, he has suspended losses from prior years of $7,000. What is the net impact on Jeff's AGI this year due to the passive activity?

A)increase of $2,000
B)no net change
C)decrease of $4,000
D)decrease of $11,000

Question 48

Juan has a casualty loss of $32,500 on investment property after receiving an insurance settlement. This is Juan's only casualty transaction this year. Juan's loss is

A)an ordinary loss.
B)a capital loss.
C)a Sec. 1231 loss.
D)a Sec. 1244 loss.

Question 49

Amy, a single individual and sole shareholder of Brown Corporation, sold all of the Brown stock for $30,000. The stock basis was $150,000. Amy had owned the stock for 3 years. Brown Corporation meets the Section 1244 requirements. Amy has

A)a $50,000 ordinary loss and $70,000 LTCL.
B)a $50,000 STCL and a $70,000 LTCL.
C)a $100,000 ordinary loss and a $20,000 LTCL.
D)a $100,000 LTCL and a $20,000 ordinary loss.

Question 50

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

Question 51

Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara's current year AGI is a(n)

A)increase of $6,000.
B)decrease of $13,000.
C)0)
D)decrease of $7,000.

Question 52

Sarah had a $30,000 loss on Section 1244 stock, a $15,000 loss on sale of a personal use automobile and a $8,000 loss on stock that is not classified as Section 1244. Without regard to net capital loss limitations, Sarah should recognize

A)a ordinary loss of $38,000.
B)a capital loss of $53,000.
C)an ordinary loss of $30,000 and a capital loss of $8,000.
D)an ordinary loss of $30,000 and a capital loss of $23,000.

Question 53

Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss. Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie. During this year, activity B produces a $9,000 loss. In addition, Charlie acquires an investment in activity X, a passive activity, this year. Charlie's share of activity X's income is $13,000. Charlie's salary this year is $70,000. As a result, this year Charlie must

A)offset B's loss carryover against X's current income and carry over $9,000 loss from activity B to next year.
B)offset B's carryover loss and current loss against X's income first and then offset any remaining loss against salary.
C)offset B's $9,000 loss against X's $13,000 income and offset B's loss carryover against the remaining $4,000 of X's income.
D)offset B's current $9,000 loss against his salary and offset B's loss carryover against X's income and carry over $4,000 of loss to next year.

Question 54

Nancy reports the following income and loss in the current year. All three activities are passive activities with respect to Nancy. Nancy also has $21,000 of suspended losses attributable to activity C carried over from prior years. During the year, Nancy sells activity C and realizes a $15,000 taxable gain. What is Nancy's AGI as a result of these transactions?

A)$50,000
B)$55,000
C)$64,000
D)$71,000

Question 55

Jamie sells investment real estate for $80,000, resulting in a $15,000 loss. Jamie's loss is

A)an ordinary loss.
B)a capital loss.
C)a Sec. 1231 loss.
D)a Sec. 1244 loss.

Question 56

The amount realized by Matt on the sale of property to Caitlin includes all of the following with the exception of

A)cash received by Matt.
B)mortgage on the property that is assumed by Caitlin.
C)mortgage on the property paid off by Matt prior to the sale.
D)the FMV of any other property received by Matt in the transaction.

Question 57

All of the following are true of losses from the sale or worthlessness of small business corporation (Section 1244)stock with the exception of

A)the stock must be owned by an individual or a partnership.
B)the stock must have been issued by a domestic corporation.
C)the stock must have been issued for cash or property other than stock or securities.
D)a single taxpayer may deduct, as ordinary losses, up to a maximum of $100,000 per tax year with the remainder treated as capital losses.

Question 58

During the year, Mark reports $90,000 of active business income from his law practice. He also owns two passive activities. From Activity A, he earns $20,000 of income, and from Activity B, he incurs a $30,000 loss. As a result, Mark

A)reports AGI of $80,000.
B)reports AGI of $90,000 with a $10,000 passive loss carryover.
C)reports AGI of $90,000 with a $30,000 passive loss carryover.
D)reports AGI of $110,000 with a $30,000 passive loss carryover.

Question 59

Lucia owns 100 shares of Cronco Inc. which she purchased on December 1 of last year for $10,000. The stock is not Sec. 1244 stock. On July 1 of the current year, Lucia receives notice from the bankruptcy court that Conco Inc. has been liquidated, and there are no assets remaining for shareholders. As a result, Lucia will have

A)a short-term capital loss of $10,000.
B)a long-term capital loss of $10,000.
C)an ordinary loss of $10,000.
D)no loss allowed.

Question 60

Lewis died during the current year. Lewis owned passive activity property with a FMV of $61,000 and a basis of $48,000. Suspended losses of $15,000 were attributable to the property. How much of the suspended loss is deductible on Lewis's final income tax return?

A)$0
B)$2,000
C)$13,000
D)$15,000

Question 61

In the current year, Marcus reports the following casualty gains and losses on personal-use property. Assets X and Y are destroyed in the first casualty while Z is destroyed in a second casualty. As a result of these losses and insurance recoveries, Marcus must report

A)a net gain of $3,700.
B)a long-term gain of $4,900 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.
C)a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.
D)a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $300 on asset Z.

Question 62

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

A)$ 8,900.
B)$ 9,900.
C)$15,000.
D)$35,000.

Question 63

Joseph has AGI of $170,000 before considering the $20,000 rental loss for property which he actively manages. How much of the rental loss can he deduct?

A)$0
B)$10,000
C)$20,000
D)$25,000

Question 64

Tom and Shawn own all of the outstanding stock of Brady Corporation (a retail store operated as a C corporation). This year, Brady generates taxable income of $20,000 from active business operations, and also reports investment interest of $22,000 and losses of $28,000 from a passive activity. As a result, Brady Corporation reports

A)net income of $42,000.
B)interest income of $22,000 and a passive loss carryover of $8,000.
C)business income of $20,000 and a passive loss carryover of $6,000.
D)business income of $20,000, interest income of $22,000, and a passive loss carryover of $28,000.

Question 65

In February 2014, 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 2014, and her 2015 AGI is $80,000. Amelia suffers no other casualty losses in either year. Amelia may deduct

A)$7,900 in 2014.
B)$22,000 in 2015.
C)$13,900 in 2015.
D)$14,000 in 2015.

Question 66

Jarrett owns a mountain chalet that he purchased in 2008 for $175,000. This year, the home appraised at $300,000. Shortly after the appraisal, a blizzard hit the area in spring of the current year, destroying trees and severely damaging several homes, including Jarrett's chalet. Its value was reduced to $135,000. Jarrett does not have insurance. Jarrett's AGI is $200,000. Jarrett's deductible loss after limitations is

A)$135,000.
B)$144,900.
C)$164,900.
D)$165,000.

Question 67

Which of the following is not generally classified as a passive activity?

A)an activity in which the taxpayer does not materially participate
B)a limited partnership interest
C)rental real estate
D)a business in which the taxpayer owns an interest and works 1,000 hours a year

Question 68

A fire totally destroyed office equipment and furniture which Monica uses in her business. The equipment had an adjusted basis of $15,000 and a FMV of $10,000 before the fire. The furniture's adjusted basis was $5,000 and its FMV was $2,000 before the fire. Monica's AGI for the year is $60,000. Monica does not have insurance on the destroyed assets. How much is Monica's deductible casualty loss?

A)$5,900
B)$12,000
C)$13,900
D)$20,000

Question 69

A flood damaged an auto owned by Mr. and Mrs. South on June 15 of this year. The car was only used for personal purposes. Based on these facts, what is the amount of the South's casualty loss deduction after limitations for this year?

A)$900
B)$1,000
C)$4,400
D)$4,500

Question 70

Shaunda has AGI of $90,000 and owns rental property generating a $27,000 loss. She actively manages the property. Her deductible loss is

A)$0.
B)$13,500.
C)$25,000.
D)$27,000.

Question 71

Nicole has a weekend home on Pecan Island that she purchased in 2005 for $250,000. Recently, the home was appraised at $260,000. After the appraisal, a hurricane hit Pecan Island, severely damaging Nicole's home. An appraisal placed the value of the home at $140,000 after the hurricane. Because of its prohibitive cost, Nicole had no hurricane insurance. Before any reductions or limitations, Nicole's casualty loss amount is

A)$0.
B)$10,000.
C)$120,000.
D)$140,000.

Question 72

Which of the following is most likely not considered a casualty?

A)fire loss
B)water damage caused by a busted water heater
C)death of a pine tree due to a two-day infestation of pine beetles
D)water damage to the walls and ceiling of a taxpayer's personal residence as the result of gradual deterioration of the roof

Question 73

Wesley completely demolished his personal automobile in a car accident. Damage to the auto was estimated at $35,000. Wesley had purchased the car a few years ago for $60,000. He received an insurance reimbursement of $28,000. His adjusted gross income this year was $55,000 and he incurred no other losses during the year. What amount can he deduct as a casualty loss on his income tax return after limitations?

A)$1,400
B)$1,500
C)$6,900
D)$7,000

Question 74

Brandon, a single taxpayer, had a loss of $48,000 from a rental real estate activity in which he actively participated. He also had $27,000 of income from another rental real estate activity in which he actively participated. He acquired both investments in 2014. If Brandon has no other passive income or losses and has adjusted gross income of $84,000 before considering passive activities, how much loss from rental activities can he use to offset his nonpassive income?

A)$21,000
B)$24,000
C)$25,000
D)$45,000

Question 75

Lena owns a restaurant which was damaged by a tornado. The following assets were partially destroyed: Lena has AGI of $50,000. What is the amount of Lena's deductible casualty loss?

A)$54,900
B)$60,000
C)$70,000
D)$180,000

Question 76

An individual is considered to materially participate in an activity if any of the following tests are met with the exception of

A)the individual participates in the activity for more than 500 hours during the year.
B)the individual participates in the activity for 75 hours during the year, and that participation is more than any other individual's participation for the year.
C)the individual has materially participated in the activity in any five years during the immediate preceding 10 taxable years.
D)the individual's participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals.

Question 77

A taxpayer's rental activities will be considered a trade or business, rather than a passive activity, if

A)the taxpayer performs more than 750 hours of work during the year managing the rental properties
B)the taxpayer performs more than 500 hours of work during the year managing the rental properties.
C)more than half of the taxpayers personal services performed in all business activities during the year are spent managing the rental properties.
D)conditions A and C, but not B, are satisfied.

Question 78

Leonard owns a hotel which was damaged by a hurricane. The hotel had an adjusted basis of $1,000,000 before the hurricane. A recent appraisal determined that the hotel's FMV was $1,500,000 before the hurricane and $700,000 afterwards. Leonard received insurance proceeds of $500,000. His AGI is $60,000. What is the amount of his deductible casualty loss?

A)$293,900
B)$300,000
C)$793,900
D)$800,000

Question 79

Hope sustained a $3,600 casualty loss due to a severe storm. She also incurred a $800 loss from a theft in the same year. Both the casualty and theft involved personal-use property. Hope's AGI for the year is $25,000 and she does not have insurance coverage. Hope's deductible casualty loss is

A)$1,700.
B)$1,800.
C)$4,200.
D)$4,300.

Question 80

Justin has AGI of $110,000 before considering his $30,000 loss from rental property, which he actively manages. How much of the rental loss can Justin deduct this year?

A)$10,000
B)$20,000
C)$25,000
D)$30,000