Question 1

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?

Accepted Answer

A) ($35,000 - $28,000 - $100 - $5,500) = $1,400

Question 2

Wes owned a business which was destroyed by fire in May 2017.Details of his losses follow:
  
His AGI without consideration of the casualty is $45,000.
What is Wes's net casualty loss deduction for 2017?

Accepted Answer

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

Question 3

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

If the payment of the debt was not intended as a gift, the guarantor may deduct the loss.

Question 4

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

Individuals deduct nonbusiness bad debt as a short-term capital loss regardless of the outstanding period.

Question 5

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 can be harder to substantiate.

Question 6

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

Ella is cash basis so she has not yet recognized the related income and therefore has no basis in the debt.

Question 7

Juanita,who is single,is in an automobile accident in 2017 and her car sustains $6,200 in damages.Juanita does not expect to recover any of the loss from her insurance company.Juanita's 2017 AGI is $31,000,and she deducts a $3,000 loss after applying limitations on her 2017 tax return.Her other itemized deductions in 2017 exceed $12,000.In 2018,Juanita's insurance company reimburses her $2,800.Juanita's 2018 AGI is $28,000.As a result,Juanita must

Accepted Answer

C)
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Question 8

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

Accepted Answer

There is no deduction for a bad debt if the taxpayer has no basis in a receivable.

Question 9

Constance,who is single,is in an automobile accident in 2017,and her car sustains $6,200 in damages.Constance does not expect to recover any of the loss from her insurance company.Constance's 2017 AGI is $31,000.Her casualty loss is $3,000; she has other itemized deductions of $1,200.In 2018,Constance's insurance company reimburses her $2,800.Constance's 2018 AGI is $28,000.As a result,Constance must

Accepted Answer

B)
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Question 10

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 11

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

In order to be classified as a business bad debt, the debt must be related to the taxpayer's trade or business. See "Typical Misconception."

Question 12

Daniel's cabin was destroyed in a massive tornado in 2017.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

Accepted Answer

D) When a taxpayer incurs a casualty loss in an area declared a disaster area by the President of the United States, he can elect to deduct the loss in the year the loss occurs or in the preceding year's tax return.

Question 13

Determine the net deductible casualty loss on Schedule A for Alan Michael when his adjusted gross income was $40,000 in 2017 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 14

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

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 15

In February 2017,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 2017,and her 2018 AGI is $80,000.Amelia suffers no other casualty losses in either year.Amelia may deduct

Accepted Answer

D) Loss deducted in 2017 and 2018:
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Question 16

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

Accepted Answer

D) As a cash-basis taxpayer, Taj has no basis in the receivable.

Question 17

No deduction is allowed for a partially worthless nonbusiness debt.

Accepted Answer

A taxpayer cannot deduct a loss for a nonbusiness debt that is still partially recoverable during the year.

Question 18

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 19

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

A taxpayer must generally use the specific identification method for bad debt deductions.

Question 20

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?

Accepted Answer

A)
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Quiz 8: Losses and Bad Debts

Wes owned a business which was destroyed by fire in May 2017.Details of his losses follow: His AGI without consideration of the casualty is $45,000. What is Wes's net casualty loss deduction for 2017?