Question 1

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.

Accepted Answer

A)Where partial recovery is expected in a subsequent year,the loss may be deducted in the year of the casualty for the estimated unrecovered amount.Lesser of adjusted basis or loss in value [($120,000 - $85,000)- $21,000 anticipated insurance recovery - $100 floor - $5,000 AGI =$8,900].Anticipated recovery is 60% × $35,000 = $21,000.

Question 2

Daniel's cabin was destroyed in a massive tornado in 2016.After consideration of insurance,he has a loss of $15,000.The President of the United States has declared the area a disaster area.Daniel can deduct this loss in
A)2015.
B)2016.
C)2017.
D)either 2015 or 2016.

Accepted Answer

Since the area was declared a disaster area, Daniel can choose to deduct the loss in the year the disaster occurred (2016) or the previous year (2015).

Question 3

In October 2016,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 2017.Creditors are informed that no assets are available for payment.Jonathon Remodeling Co.will report
A)$0 income in both years.
B)$30,000 income in 2016 and a bad debt deduction of $30,000 in 2017.
C)$30,000 income in 2016 and a STCL of $30,000 in 2017 limited to $3,000 after netting.
D)$30,000 income in 2016 and then must amend last year's return to show $0 income when advised of the bankruptcy.

Accepted Answer

Under the accrual method of accounting, income is recognized when earned, which in this case is when the remodeling and renovation services were completed in 2016. Since Dale's debt became uncollectible in 2017 due to his bankruptcy, Jonathon Remodeling Co. can claim a bad debt deduction in 2017 equal to the amount of income recognized in 2016, which is $30,000. Therefore, Jonathon Remodeling Co. will report $30,000 of income in 2016 and a bad debt deduction of $30,000 in 2017.

Question 4

What is or are the standards that must be present to warrant a casualty loss deduction?

Accepted Answer

The answer of What is or are the standards that...

Question 5

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)
A)itemized deduction.
B)ordinary loss.
C)long-term capital loss.
D)short-term capital loss.

Accepted Answer

The answer of Last year,Abby loaned her friend,Pat,$10,000.Although Pat had...

Question 6

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

Accepted Answer

A bona fide debtor-creditor relationship can exist between related parties, but it may require extra scrutiny to ensure that the transaction is an arms-length and not a disguised gift or transfer of assets. It is important for related parties to document and disclose the terms of any financial arrangements in order to avoid any appearance of favoritism or impropriety.

Question 7

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

Accepted Answer

This is true. A business bad debt is deductible as an ordinary loss, while a nonbusiness bad debt is classified as a short-term capital loss.

Question 8

Ella is a cash basis sole proprietor providing senior care services to clients.One of her clients passes away owing her $1,500 for services performed.Ella has been notified that there are no assets in the estate to pay her bill.Ella will be able to recognize a business bad debt.

Accepted Answer

The answer of Ella is a cash basis sole proprietor...

Question 9

A taxpayer suffers a casualty loss on personal-use property for which he has insurance coverage.However,to avoid a premium increase,the taxpayer fails to make a timely claim.In this situation is the full deduction for the casualty,after the normal floors,available to the taxpayer? Why or why not?

Accepted Answer

The answer of A taxpayer suffers a casualty loss on...

Question 10

In February 2016,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 2016,and her 2017 AGI is $80,000.Amelia suffers no other casualty losses in either year.Amelia may deduct
A)$7,900 in 2016.
B)$22,000 in 2017.
C)$13,900 in 2017.
D)$14,000 in 2017.

Accepted Answer

The answer of In February 2016,Amelia's home,which originally cost $150,000,is...

Question 11

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.

Accepted Answer

This is known as a bad debt, and is deductible as a loss on the taxpayer's tax return.

Question 12

Taj operates a sole proprietorship,maintaining the business records under the cash-basis method of accounting.Taj performs services for a client and sends the client a bill for $12,000.Six months later,before payment is received by Taj,the client files bankruptcy,with no assets available for unsecured creditors such as Taj.Taj will deduct
A)$12,000 ordinary loss.
B)$3,000 long-term capital loss.
C)$3,000 short-term capital loss.
D)$0.

Accepted Answer

Taj operates under the cash-basis method of accounting, which means income and expenses are recognized when cash is received or paid. Taj has not received any payment for the services provided to the client, so there is no income to deduct. Since the client has filed for bankruptcy and there are no assets available for unsecured creditors like Taj, there is also no loss to deduct. Therefore, the answer is D, $0.

Question 13

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.

Accepted Answer

The answer of Lisa loans her friend,Grace,$10,000 to finance a...

Question 14

Wes owned a business which was destroyed by fire in May 2016.Details of his losses follow:
  His AGI without consideration of the casualty is $45,000.
What is Wes's net casualty loss deduction for 2016?

Accepted Answer

The answer of Wes owned a business which was destroyed...

Question 15

Constance,who is single,is in an automobile accident in 2016,and her car sustains $6,200 in damages.Constance does not expect to recover any of the loss from her insurance company.Constance's 2016 AGI is $31,000.Her casualty loss is $3,000;she has other itemized deductions of $1,200.In 2017,Constance's insurance company reimburses her $2,800.Constance's 2017 AGI is $28,000.As a result,Constance must
A)amend the 2017 return to show the $200 loss.
B)do nothing and simply keep the $2,800.
C)amend the 2016 return to show $0 loss and file her 2017 return to show $200 loss.
D)do nothing to the 2016 return but report $2,800 of income on her 2017 return.

Accepted Answer

The answer of Constance,who is single,is in an automobile accident...

Question 16

Determine the net deductible casualty loss on the Schedule A for Alan Michael when his adjusted gross income was $40,000 in 2016 and the following occurred:
  A and B were destroyed in the same casualty in March.C was destroyed in a separate casualty in July.
All casualty losses were nonbusiness personal use property losses and none occurred in a federally declared disaster area.
What is the amount of the net deductible casualty loss?

Accepted Answer

The answer of Determine the net deductible casualty loss on...

Question 17

A taxpayer uses an allowance method (i.e.aging method)of calculating bad debt expense for purposes of the business' financial statements.For income tax purposes,she will also use the allowance method to calculate the bad debt deduction.

Accepted Answer

The answer of A taxpayer uses an allowance method (i.e.aging...

Question 18

No deduction is allowed for a partially worthless nonbusiness debt.

Accepted Answer

According to the IRS, "In general, if a debt becomes partially worthless, the loss is the amount of the debt that is charged off during the taxable year. However, no deduction is allowed for a partially worthless nonbusiness debt." (Source: https://www.irs.gov/publications/p550#en_US_2019_publink100010302)

Question 19

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

Accepted Answer

The taxpayer must have a basis in the debt in order for a bad debt to be deductible. If the debt was never included in the taxpayer's income, then they don't have a basis in the debt and cannot claim a deduction for it.

Question 20

Juanita,who is single,is in an automobile accident in 2016 and her car sustains $6,200 in damages.Juanita does not expect to recover any of the loss from her insurance company.Juanita's 2016 AGI is $31,000,and she deducts a $3,000 loss on her 2016 tax return.Her other itemized deductions in 2016 exceed $12,000.In 2017,Juanita's insurance company reimburses her $2,800.Juanita's 2017 AGI is $28,000.As a result,Juanita must
A)amend 2016 to show a $200 loss.
B)do nothing and simply keep the $2,800.
C)do nothing to the 2016 return but report $2,800 of income on her 2017 return.
D)amend the 2016 return to show $0 loss and file her 2017 return to show a $200 loss.

Accepted Answer

Juanita deducted the $3,000 loss on her 2016 tax return, when she did not expect to receive any reimbursement. Therefore, she must report the $2,800 reimbursement as income on her 2017 tax return. She does not need to amend her 2016 tax return because the loss deduction was appropriate at the time she filed. Also, since her AGI in 2017 is lower than in 2016, there is no need to amend the 2016 tax return or to file a 2017 return with a $200 loss.

Quiz 8: Losses and Bad Debts

Daniel's cabin was destroyed in a massive tornado in 2016.After consideration of insurance,he has a loss of $15,000.The President of the United States has declared the area a disaster area.Daniel can deduct this loss in