Question 1

In 2015 Grace loaned her friend Paula $12,000 to invest in various stocks. Paula signed a note to repay the principal with interest. Unfortunately the market for that industry sector plunged, and Paula incurred large losses. In 2016 Paula declared personal bankruptcy and Grace was unable to collect any of her loan. Grace had no other gains or losses last year or this year. The result is
A) Grace deducts a business bad debt of $12,000 in 2016.
B) Grace deducts a $12,000 nonbusiness bad debt as a short-term capital loss in 2016.
C) Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2016 and carries $9,000 over to subsequent years.
D) Grace deducts a business bad debt of $3,000 in 2016 and carries $9,000 over to subsequent years.

Accepted Answer

The answer of In 2015 Grace loaned her friend Paula...

Question 2

Vera has a key supplier for her business who was facing cash flow problems which would impair Vera's ability to get shipments of key components for her production. Vera made a $10,000 loan to the supplier. Unfortunately the supplier filed for bankruptcy and has gone out of business without repaying Vera. Vera will be able to recognize a loss of
A) $10,000.
B) $3,000.
C) $7,000.
D) 0.

Accepted Answer

Since the supplier has filed for bankruptcy and gone out of business without repaying Vera, she will have to write off the entire $10,000 loan as a loss. Therefore, the correct choice is A.

Question 3

If a loan has been made to a related party, what are some considerations for determining whether the loan is a bona fide debt or is, in fact, merely a gift?

Accepted Answer

The answer of If a loan has been made to...

Question 4

An individual taxpayer has negative taxable income for the year. In calculating the net operating loss created, which of the following expenses or losses will be added back to the negative taxable income?
A) capital losses
B) personal and dependency exemptions
C) nonbusiness deductions in excess of nonbusiness income
D) all of the above

Accepted Answer

All three options will be added back in calculating the net operating loss created, as they all reduce the individual's taxable income. Capital losses are not deductible against ordinary income, but they are used to offset capital gains or carried forward to future years. Personal and dependency exemptions are deductions used to reduce taxable income, and nonbusiness deductions in excess of nonbusiness income can be used to reduce taxable income to zero, but cannot create a negative taxable income. Therefore, all three options will be added back in the calculation of the net operating loss created.

Question 5

Kayla reported the following amounts in her 2016 tax return: $$\begin{array} { | l | r | } 
\hline \text { Interest income } & \$ 6,000 \
\hline \text { Loss from sole proprietorship } & ( 20,000 ) \
\hline \text { AGI } & ( 14,000 ) \
\hline \text { Standard deduction } & ( 6,300 ) \
\hline \text { Personal exemption } & ( 4,050 ) \
\hline & ( \$ 24,350 ) \
\hline
\end{array}$$ Kayla has generated an NOL of
A) $0.
B) ($24,350).
C) ($14,000).
D) ($20,000).

Accepted Answer

Kayla reported $21,000 of taxable income and a $1,000 capital loss in her 2016 tax return. She also received a $40,000 NOL carryover from 2015. However, the maximum NOL deduction she can claim in 2016 is $21,000 (which would reduce her taxable income to $0), and the remaining $19,000 of the NOL carryover can be carried forward to future tax years. Therefore, Kayla has generated an NOL of ($19,000) in 2016.

Question 6

Which of the following expenses or losses could create a net operating loss for an individual taxpayer?
A) large losses on sales of investment assets
B) an operating loss from a sole proprietorship
C) large charitable contributions
D) all of the above

Accepted Answer

The answer of Which of the following expenses or losses...

Question 7

A taxpayer has generated a net operating loss in the current year and is weighing whether to carryback the NOL or elect to carryforward the NOL. The factors to consider in making this decision include all of the following except
A) marginal tax rates in the relevant years.
B) tax credits available in the carryback years.
C) time value of money.
D) refundable tax credits expected in future years.

Accepted Answer

The factors to consider when deciding whether to carryback or carryforward an NOL include the taxpayer's marginal tax rates in the relevant years, tax credits available in the carryback years, and the time value of money. Refundable tax credits expected in future years do not affect this decision because they can be claimed regardless of whether the NOL is carried back or carried forward.

Question 8

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

Accepted Answer

The answer of A net operating loss can be carried...

Question 9

A taxpayer has low AGI this year, but unusually high itemized deductions. The one itemized deduction that is allowed to increase the NOL is
A) state and local income and property taxes.
B) home mortgage interest.
C) medical expenses.
D) casualty loss on personal-use assets.

Accepted Answer

D)Nonbusiness itemized deductions are added back to the extent they exceed nonbusiness income.Only casualty losses on personal-use assets do not require addback.

Question 10

Distinguish between the accrual-method taxpayer and the cash-method taxpayer with regard to basis in a receivable.

Accepted Answer

The answer of Distinguish between the accrual-method taxpayer and the...

Question 11

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

Accepted Answer

A net operating loss generally involves only business income and expenses.

Question 12

Frank loaned Emma $5,000 in 2014 with the agreement that the loan would be repaid in three years. In 2015, Emma filed for bankruptcy and based on available information from the bankruptcy court, it was estimated that Frank could expect to receive $.65 on the dollar. In 2016, final settlement was made and Frank received $600.
a. Assuming the loan is a business bad debt, what is the amount of and the nature of Frank's deduction in 2015?
b. Assuming the loan is a business bad debt, what is the amount of and the nature of Frank's deduction in 2016?
c. Assuming instead that the loan is a nonbusiness bad debt, what is the amount of and the nature of Frank's deduction in 2015 and 2016?

Accepted Answer

The answer of Frank loaned Emma $5,000 in 2014 with...

Question 13

Becky, a single individual, reports the following taxable items in 2016:
 $\begin{array}{llr}
  \text { Gross income from business  } &\$93,000\
 \text { Mintus: Business expenses } & \underline{(105,000)}\
&(\$12,000)\
 \text { Interest income } & \underline{1,500}\
 \text { A G I   } &(\$10,500)
\end{array}$
 Itemized deductions:
 $\begin{array}{ll}
\text { Interest expense } & \$ 3,100 \
\text { State Income Taxes } & 1,900 \
\text { Casualty } &  \underline{3,000} \
  \text {Total itemized deductions  } &&(8,000)\
 \text { Minus: Personal exemption } && \underline{(4,050)}\
 \text {  Taxable income} && \underline{(\$22,550)}

\end{array}$
 What is Becky's NOL for the year?

Accepted Answer

The answer of Becky, a single individual, reports the following...

Question 14

Martha, an accrual-method taxpayer, has an accounting practice. In 2015, she performs tax analyses for Arnold and sends him an invoice for $10,000. In 2016, Martha sells her practice and all accounts to David. Arnold's debt becomes worthless that year after David has purchased the practice. The result is
A) Martha deducts a nonbusiness bad debt in 2016.
B) Martha deducts a business bad debt in 2016.
C) David deducts a business bad debt in 2016.
D) David deducts a nonbusiness bad debt in 2016.

Accepted Answer

The answer of Martha, an accrual-method taxpayer, has an accounting...

Question 15

A taxpayer's home is destroyed by fire, resulting in a large casualty loss deduction exceeding the taxpayer's income. The taxpayer will be allowed to carry back and then carry forward a net operating loss due to this personal loss.

Accepted Answer

According to the IRS, in the case of a casualty loss that exceeds a taxpayer's income, they may have a net operating loss that can be carried back and then carried forward to future tax years.

Question 16

Harley, a single individual, provided you with the following information for this year:
Income:
 $$\begin{array} { | l | r | } 
\hline \text { Salary from part-time employment } & \$ 16,000 \
\hline \text { Interest income from savings } & 1,000 \
\hline \text { Net long-term capital gain from investment property } & 3,000 \
\hline
\end{array}$$ Deductions:
 $$\begin{array}{|l|l|}
\hline\text { Net business loss }\
\text { (sales of } \$ 100,000 \text { less expenses of } \$ 130,000 ) & ( \$ 30,000 ) \
\hline \text { Personal exemption } & ( 4,050 ) \
\hline \text { Standard deduction } & ( 6,300 ) \
\hline \text { Net-operating loss carryover from last year } & ( 3,000 )\
\hline
\end{array}$$ What is the amount of Harley's net operating loss for this year?

Accepted Answer

The answer of Harley, a single individual, provided you with...

Question 17

Due to an unusual event, a taxpayer has a large loss in the current year, resulting in an NOL. The taxpayer expects next year's taxable income to return to the same approximate amount he reported in last few years, however he expects his income tax rate to increase after this year's election. The taxpayer should elect to forego the carryback period.

Accepted Answer

By electing to forego the carryback period, the taxpayer can carry the NOL forward to future years when he expects to have higher income tax rates. This will maximize the tax savings from the NOL. Additionally, if the taxpayer's income remains high in the future years, he may be able to use the NOL to offset the increased taxable income and avoid being pushed into a higher tax bracket.

Question 18

If an NOL is incurred, when would a taxpayer elect to forgo the carryback period and only carry the loss deduction forward?

Accepted Answer

The answer of If an NOL is incurred, when would...

Question 19

A taxpayer incurs a net operating loss in the current year. With respect to the application of the NOL,
A) the taxpayer will carry back the NOL three years first, then carry forward any balance for five years.
B) the taxpayer must carry forward the loss and has up to 20 years to use it.
C) the taxpayer can carry forward the loss indefinitely until there is sufficient taxable income to use it up.
D) the taxpayer will first carry back the NOL for two years, then carryforward the balance for a period of 20 years, or the taxpayer can elect to only carry forward the loss for the 20-year allowable period.

Accepted Answer

According to current tax laws, a taxpayer can carry back an NOL for two years and carry forward any unused portion for up to 20 years. The taxpayer also has the option to forego the carryback period and only carry forward the loss for the 20-year period. Therefore, choice D is the best option.

Question 20

What are some factors which indicate that a debt may be worthless?

Accepted Answer

The answer of What are some factors which indicate that...

Quiz 23: Losses and Bad Debts

If a loan has been made to a related party, what are some considerations for determining whether the loan is a bona fide debt or is, in fact, merely a gift?

An individual taxpayer has negative taxable income for the year. In calculating the net operating loss created, which of the following expenses or losses will be added back to the negative taxable income?

Which of the following expenses or losses could create a net operating loss for an individual taxpayer?

A taxpayer has generated a net operating loss in the current year and is weighing whether to carryback the NOL or elect to carryforward the NOL. The factors to consider in making this decision include all of the following except