Question 1

In 2018, 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:  What is Grant's allowable casualty loss deduction?
A)$0
B)$6,500
C)$6,900
D)$10,000
E)$80,000

Accepted Answer

The answer of In 2018, Grant's personal residence was completely...

Question 2

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 the above.

Accepted Answer

The answer of Peggy is in the business of factoring...

Question 3

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 judgement.Jed was able to collect the judgement 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 the above

Accepted Answer

Jed incurred a loss of $5,000 ($15,000 billed - $10,000 paid by Alison) and was only able to collect $2,000 from the judgement. Therefore, he can deduct the remaining loss of $3,000 in the current year as a business bad debt.

Question 4

In the current year, Louise invests $50,000 for a 20% interest in a passive activity.Her share of the loss this year is
$10,000.If this is her only passive activity, the $10,000 loss from the activity this year is suspended for use in a future year.

Accepted Answer

According to passive activity loss rules, if an individual has only one passive activity and incurs a loss, that loss is suspended and can be used in a future year when there is sufficient passive income or the individual disposes of the passive activity. Therefore, the $10,000 loss from the passive activity in the current year will be suspended for use in a future year if it is Louise's only passive activity.

Question 5

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2018.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 the above

Accepted Answer

The answer of Norm's car, which he uses 100% for...

Question 6

Which of the following events would produce a deductible loss in 2018?
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 the above.

Accepted Answer

The answer of Which of the following events would produce...

Question 7

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 the above.

Accepted Answer

The answer of Five years ago, Tom loaned his son...

Question 8

Joyce, an architect, earns $100,000 from her practice in the current year.In addition, she receives $35,000 in dividends, capital gains, and annuity income during the year.Further, she incurs a loss of $35,000 from an investment in a passive activity.Joyce's AGI for the year after considering the passive investment is $100,000.

Accepted Answer

The answer of Joyce, an architect, earns $100,000 from her...

Question 9

Kathy, who qualifies as a real estate professional, owns an apartment building and devotes 550 hours to managing the activity.All losses from the rental activity will be considered nonpassive and deductible against active income.

Accepted Answer

The answer of Kathy, who qualifies as a real estate...

Question 10

John had adjusted gross income of $60,000 in 2018.During the year his personal use summer home was damaged by a fire.Pertinent data with respect to the home follows:  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:
 What is John's itemized casualty loss deduction?
A)$0
B)$2,000
C)$17,000
D)$18,000
E)None of the above

Accepted Answer

The answer of John had adjusted gross income of $60,000...

Question 11

Jennifer gave her interest in a passive activity fair market value of $75,000 and basis of $60,000) to Harrison.Associated with the interest is a suspended passive activity loss of $8,000.Upon making the gift, the suspended passive activity loss is not deductible to Jennifer, but it will benefit Harrison.

Accepted Answer

When Jennifer gifts her interest in a passive activity, the suspended passive activity loss of $8,000 becomes deductible to Harrison, the new owner of the interest. Jennifer cannot deduct the suspended loss upon gifting the interest.

Question 12

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 the above

Accepted Answer

The answer of Three years ago, Sharon loaned her sister...

Question 13

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 $50,000 which included $16,000 of net long-term capital gains.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 $2,000 of income for the current year.
D)Report $5,000 of income for the current year.
E)None of the above.

Accepted Answer

The answer of Two years ago, Gina loaned Tom $50,000.Tom...

Question 14

Gloria owns and works fulltime at a shop that rents watercraft of various types to tourists who are vacationing at the beach.If she generates a loss from that activity, the loss is subject to the passive activity loss rules because it is rental property.

Accepted Answer

The loss from the activity is not subject to the passive activity loss rules because Gloria materially participates in the business, making it a non-passive activity despite it involving rental property.

Question 15

Jim had a car accident in 2018 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 the above

Accepted Answer

The answer of Jim had a car accident in 2018...

Question 16

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 the above

Accepted Answer

The answer of Last year, Lucy purchased a $100,000 account...

Question 17

Mary incurred a $20,000 nonbusiness bad debt last year.She also had an $18,000 long-term capital gain last year.Her taxable income for last year was $25,000.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 the above

Accepted Answer

The answer of Mary incurred a $20,000 nonbusiness bad debt...

Question 18

On June 2, 2017, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000.Fred's TV Sales uses the accrual method.In 2018, 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 2019, final settlement was made and Fred received $1,000.How much bad debt loss can Fred deduct in 2019?
A)$0
B)$7,000
C)$8,000
D)$12,000
E)None of the above

Accepted Answer

The answer of On June 2, 2017, Fred's TV Sales...

Question 19

On September 3, 2017, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31, 2017, the stock was worth $85,000.On August 15, 2018, Able was notified that the stock was worthless.How should Able report this item on his 2018 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 the above.

Accepted Answer

The answer of On September 3, 2017, Able, a single...

Question 20

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

Accepted Answer

The answer of Anita owns Activity A which produces active...

Quiz 6: Losses and Loss Limitations

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?

In the current year, Louise invests $50,000 for a 20% interest in a passive activity.Her share of the loss this year is $10,000.If this is her only passive activity, the $10,000 loss from the activity this year is suspended for use in a future year.

Which of the following events would produce a deductible loss in 2018?

Kathy, who qualifies as a real estate professional, owns an apartment building and devotes 550 hours to managing the activity.All losses from the rental activity will be considered nonpassive and deductible against active income.

Gloria owns and works fulltime at a shop that rents watercraft of various types to tourists who are vacationing at the beach.If she generates a loss from that activity, the loss is subject to the passive activity loss rules because it is rental property.

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.

Mary incurred a $20,000 nonbusiness bad debt last year.She also had an $18,000 long-term capital gain last year.Her taxable income for last year was $25,000.During the current year, she unexpectedly collected $12,000 on the debt.How should Mary account for the collection?

On September 3, 2017, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31, 2017, the stock was worth $85,000.On August 15, 2018, Able was notified that the stock was worthless.How should Able report this item on his 2018 tax return?

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