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

Question 1

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 1

False
Explanation:The taxpayer must include the $10,000 in gross income to the extent of the tax benefit received last year.The entire $10,000 deduction provided a tax benefit;$8,000 offset by the short-term capital gain and $2,000 offset against ordinary income.

Question 2

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 2

False
Explanation:John did not buy the stock from Red Corporation,and therefore,it is not § 1244 stock to him.John has a $17,000 long-term capital loss.

Question 3

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

Answer 3

True
Explanation: A loss is allowed for securities that become completely worthless during the tax year.

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

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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 12

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 13

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

Question 14

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

Question 15

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

Question 16

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 17

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

Question 18

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

Question 19

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 20

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

Question 21

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 22

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

Question 23

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 24

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 25

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 26

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 27

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

Question 28

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 29

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

Question 30

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 its adjusted basis,a gain is recognized.

Question 31

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 32

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

Question 33

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

Question 34

Losses on rental property are classified as deductions for AGI.

Question 35

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 36

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

Question 37

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

Question 38

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 39

The current position of the IRS is that a personal casualty loss deduction is not allowed for losses resulting from termites.

Question 40

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

Question 41

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

Question 42

An NOL carryforward is used in determining the current year's charitable contribution deduction.

Question 43

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

Question 44

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 these

Question 45

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

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 these

Question 47

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 these

Question 48

A reimbursed employee business expense cannot create an NOL for an individual.

Question 49

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 these.

Question 50

An individual taxpayer who does not itemize deductions uses the standard deduction to compute the excess of nonbusiness deductions over the sum of nonbusiness income and net nonbusiness capital gains for purposes of computing net operating loss.

Question 51

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 these

Question 52

A farming NOL may be carried back 2 years.

Question 53

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 these.

Question 54

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 55

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 these.

Question 56

When a net operating loss is carried back to a non-loss year,the net operating loss can affect the medical expense deduction of the carryback year.

Question 57

The excess of nonbusiness capital gains over nonbusiness capital losses must be added to taxable income to compute the net operating loss of an individual.

Question 58

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 these.

Question 59

Nonbusiness income for net operating loss purposes includes dividends received.

Question 60

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 these

Question 61

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 these

Question 62

In 2014,Juan's home was burglarized.Juan had the following items stolen: -Securities worth $25,000.Juan purchased the securities four years ago for $20,000.
-New tools which Juan had purchased two weeks earlier for $8,000.Juan uses the tools in making repairs at an apartment house that he owns and manages.
-An antique worth $15,000.Juan inherited the antique (a family keepsake)when the property was worth $11,000.
Juan's homeowner's policy had a $50,000 deductible clause for thefts.If Juan's salary for the year is $50,000,determine the amount of his itemized deductions as a result of the theft.

A)$3,100
B)$6,000
C)$26,100
D)$26,500
E)None of these

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 these.

Question 64

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 these.

Question 65

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 66

Alicia was involved in an automobile accident in 2014.Her car was used 60% for business and 40% for personal use.The car had originally cost $40,000.At the time of the accident,the car was worth $20,000 and Alicia had taken $8,000 of depreciation.The car was totally destroyed and Alicia had let her car insurance expire.If Alicia's AGI is $50,000 (before considering the loss),determine her itemized deduction for the casualty loss.

A)$4,500
B)$6,100
C)$8,000
D)$24,000
E)None of these

Question 67

In 2014,Morley,a single taxpayer,had an AGI of $30,000 before considering the following items: 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 these

Question 68

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 these are qualified expenditures.

Question 69

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 these.

Question 70

Last year,Green Corporation incurred the following expenditures in the development of a new plant process: $\begin{array}{lr}\text { Salaries } & \$ 250,000 \\\text { Materials } & 90,000 \\\text { Utilities } & 20,000 \\\text { Quality control testing costs } & 40,000 \\\text { Management study costs } & 5,000 \\\text { Depreciation of equipment } & 18,000\end{array}$ 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 these

Question 71

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 these.

Question 72

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 these

Question 73

On July 20,2013,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 10,2013,Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000.On September 15,2014,Matt sold the 4,000 shares of stock for $120,000.How should Matt treat the sale of the stock on his 2014 return?

A)$54,000 ordinary loss.
B)$100,000 ordinary loss;$46,000 net capital gain.
C)$100,000 ordinary loss;$20,000 STCL.
D)$130,000 ordinary loss;$66,000 LTCG.
E)None of these.

Question 74

In 2014,Theo,an employee,had a salary of $30,000 and experienced the following losses: 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 these

Question 75

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: $\begin{array}{lr}\text { Cost basis } & \$ 260,000 \\\text { Value before the fire } & 400,000 \\\text { Value after the fire } & 100,000 \\\text { Insurance recovery } & 270,000\end{array}$ 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:
$\begin{array}{lll}\text {Cost basis }&\$80,000\\\text {Value before the accident }&56,000\\\text {Value after the accident }&20,000\\\text {Insurance recovery }&18,000\\\end{array}$
What is John's itemized casualty loss deduction?

A)$0
B)$2,000
C)$17,000
D)$18,000
E)None of these

Question 76

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 77

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 these

Question 78

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 these

Question 79

In 2014,Mary had the following items: 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 these

Question 80

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 these.