Question 1

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

Accepted Answer

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 
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 B

Question 2

A capital loss may arise from the sale or exchange of a capital asset.

Accepted Answer

A) True 
 B)False  True

Question 3

If a taxpayer disposes of an interest in a passive activity, unused carryover losses are available to the purchaser of the interest.

Accepted Answer

A) True 
 B)False  False

Question 4

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

Accepted Answer

1. The loss must ari

Question 5

Nicole has a weekend home on Pecan Island that she purchased in 2013 for $250,000. Recently, the home was appraised at $260,000. After the appraisal, a hurricane hit Pecan Island, severely damaging Nicole's home. An appraisal placed the value of the home at $140,000 after the hurricane. Because of its prohibitive cost, Nicole had no hurricane insurance. Before any reductions or limitations, Nicole's casualty loss amount is

Accepted Answer

A)  $0. 
B)  $10,000. 
C)  $120,000. 
D)  $140,000. 
A)  $0. 
B)  $10,000. 
C)  $120,000. 
D)  $140,000.

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

A) True 
 B)False

Question 7

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

a. 2015 deduction-$1,750 ordinary loss (

Question 8

In order to be recognized and deducted on a tax return, a loss must first be realized.

Accepted Answer

A) True 
 B)False

Question 9

Once an activity has been classified as passive, it is considered passive with regard to that taxpayer until it is sold.

Accepted Answer

A) True 
 B)False

Question 10

If a taxpayer suffers a loss attributable to a disaster in an area subsequently declared a disaster area, the casualty loss may be deducted in the year preceding the year in which the loss actually occurs.

Accepted Answer

A) True 
 B)False

Question 11

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) True 
 B)False

Question 12

In the case of casualty losses of personal-use property, the losses sustained in each separate casualty are reduced by both $100 and 10 percent of the taxpayer's AGI for the year.

Accepted Answer

A) True 
 B)False

Question 13

Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara's current year AGI is a(n)

Accepted Answer

A)  increase of $6,000. 
B)  decrease of $13,000. 
C)  0. 
D)  decrease of $7,000. 
A)  increase of $6,000. 
B)  decrease of $13,000. 
C)  0. 
D)  decrease of $7,000.

Question 14

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

Accepted Answer

A)  2015. 
B)  2016. 
C)  2017. 
D)  either 2015 or 2016. 
A)  2015. 
B)  2016. 
C)  2017. 
D)  either 2015 or 2016.

Question 15

The total worthlessness of a security generally results in an ordinary loss.

Accepted Answer

A) True 
 B)False

Question 16

One of the requirements which must be met for stock to be considered Section 1244 stock is that the corporation cannot have more than $10 million of total capital and paid in surplus as of the stock issuance.

Accepted Answer

A) True 
 B)False

Question 17

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) True 
 B)False

Question 18

Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  $0. 
B)  ($24,350). 
C)  ($14,000). 
D)  ($20,000). 
A)  $0. 
B)  ($24,350). 
C)  ($14,000). 
D)  ($20,000).

Question 20

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

Accepted Answer

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. 
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.

Exam 23: Losses and Bad Debts

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

A capital loss may arise from the sale or exchange of a capital asset.

If a taxpayer disposes of an interest in a passive activity, unused carryover losses are available to the purchaser of the interest.

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

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.

In order to be recognized and deducted on a tax return, a loss must first be realized.

Once an activity has been classified as passive, it is considered passive with regard to that taxpayer until it is sold.

If a taxpayer suffers a loss attributable to a disaster in an area subsequently declared a disaster area, the casualty loss may be deducted in the year preceding the year in which the loss actually occurs.

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.

In the case of casualty losses of personal-use property, the losses sustained in each separate casualty are reduced by both $100 and 10 percent of the taxpayer's AGI for the year.

Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara's current year AGI is a(n)

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

The total worthlessness of a security generally results in an ordinary loss.

One of the requirements which must be met for stock to be considered Section 1244 stock is that the corporation cannot have more than $10 million of total capital and paid in surplus as of the stock issuance.

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

Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

Kayla reported the following amounts in her 2016 tax return: Interest income \ 6,000 Loss from sole proprietorship (20,000) AGI (14,000) Standard deduction (6,300) Personal exemption (4,050) (\ 24,350) Kayla has generated an NOL of

Tax Research

Corporate Formations and Capital Structure

The Corporate Income Tax

Corporate Nonliquidating Distributions

Other Corporate Tax Levies

Corporate Liquidating Distributions

Corporate Acquisitions and Reorganizations

Consolidated Tax Returns

Partnership Formation and Operation

Special Partnership Issues

S Corporations

The Gift Tax

The Estate Tax

Income Taxation of Trusts and Estates

Administrative Procedures

an Introduction to Taxation

Determination of Tax

Gross Income: Inclusions

Gross Income: Exclusions

Property Transactions: Capital Gains and Losses

Deductions and Losses

Itemized Deductions

Employee Expenses and Deferred Compensation

Depreciation, Cost Recovery, Amortization, and Depletion

Accounting Periods and Methods

Property Transactions: Nontaxable Exchanges

Property Transactions: Section 1231 and Recapture

Special Tax Computation Methods, Tax Credits, and Payment of Tax

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