Deck 7: Deductions and Losses: Certain Business Expenses and Losses

Question 1

If a taxpayer sells her or his § 1244 stock at a loss, all of the loss will be ordinary loss.

Answer 1

False

Question 2

Al, who is single, has a gain of $40,000 on the sale of § 1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock.As a result, Al has a $40,000 ordinary loss.

Answer 2

False

Question 3

A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.

Answer 3

True

Question 4

Other casualty means casualties similar to those associated with fires, storms, or shipwrecks.

Question 5

A loss from a worthless security is always treated as a short-term capital loss.

Question 6

If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year.

Question 7

The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.

Question 8

A loss is not allowed for a security that declines in value.

Question 9

Several years ago, John purchased 2,000 shares of Red Corporation's § 1244 stock from Mark for $40,000.Last year, John sold one-half of his Red Corporation stock to Mike for $12,000.During the current year, John sold the remaining Red Corporation stock for $3,000.John has a $17,000 ($3,000 - $20,000) ordinary loss for the current year.

Question 10

A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.

Question 11

If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year.

Question 12

A bond held by an investor that is uncollectible will be treated as a worthless security and, hence, produce a capital loss.

Question 13

In determining whether a debt is a business or nonbusiness bad debt, the debtor's use of the borrowed funds is important.

Question 14

Last year, taxpayer had a $10,000 nonbusiness bad debt.Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000.If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income.

Question 15

An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.

Question 16

A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.

Question 17

James is in the business of debt collection.He purchased a $20,000 account receivable from Green Corporation for $15,000.During the year, he collected $17,000 in final settlement of the account.James can take a $2,000 bad debt deduction in the current year.

Question 18

A business bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless.

Question 19

A bona fide debt cannot arise on a loan between father and son.

Question 20

A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency.

Question 21

The purpose of the excess business loss rules is to limit the amount of nonbusiness income (e.g., salaries, interest, dividends) that can be sheltered from tax as a result of business losses.

Question 22

If investment property is stolen, the amount of the loss is the adjusted basis of the property at the time of the theft reduced by $100 and 10% of AGI.

Question 23

The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer.

Question 24

When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10% of adjusted gross income for the first year.

Question 25

In 2017, Amos had AGI of $50,000.In December 2017, Amos also had a diamond ring stolen that cost $20,000 and was worth $17,000 at the time of the theft.He itemized deductions on his 2017 tax return.In 2019, after a variety of investigations, Amos recovered $17,000 from the insurance company.Therefore, he must include $11,900 in gross income on the tax return for the current year.

Question 26

The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.

Question 27

If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized deduction.

Question 28

If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project if less than 60 months.

Question 29

Taxpayer's home was destroyed by a storm in the current year in a Federally declared disaster area.If the taxpayer elects to treat the loss as having occurred in the prior year, it will be subject to the 10%-of-AGI reduction based on the AGI of the current year.

Question 30

A business theft loss is taken in the year of the theft.

Question 31

If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value
(FMV) but less than its adjusted basis, a gain is recognized.

Question 32

Losses on rental property are classified as deductions for AGI.

Question 33

A father cannot claim a loss on his daughter's rental use property.

Question 34

The amount of loss for partial destruction of business property is the decline in fair market value of the business property.

Question 35

Research and experimental expenditures do not include the cost of consumer surveys.

Question 36

Currently, a personal casualty loss deduction is allowed only for losses occurring in a Federally declared disaster area.

Question 37

Personal casualty gains are allowed to offset personal casualty losses.Currently, if an excess casualty loss results, it is not deductible (unless attributable to a Federally declared disaster).

Question 38

If a noncorporate taxpayer has an excess business loss for the year, it is not allowed.

Question 39

A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.

Question 40

The cost of depreciable property is not a research and experimental expenditure.

Question 41

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 these.

Question 42

A reimbursed employee business expense cannot create a NOL for an individual.

Question 43

An NOL carryforward is used in determining the current-year's charitable contribution deduction.

Question 44

The excess of nonbusiness capital gains over nonbusiness capital losses must be added to taxable income to compute an individual's net operating loss.

Question 45

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 these.

Question 46

When a net operating loss is carried forward, it can affect the medical expense deduction of that year.

Question 47

Nonbusiness income for net operating loss purposes includes dividends received.

Question 48

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
10 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 these.

Question 49

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 these.

Question 50

Currently, a net operating loss can be carried forward only and can offset no more than 80% of taxable income in a subsequent year.

Question 51

The excess business loss rule applies to partnerships and S corporations (rather than partners and shareholders).

Question 52

The amount of a business loss cannot exceed the amount of the taxpayer's NOL for the taxable year.

Question 53

Jed is an electrician.He 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 these.

Question 54

A taxpayer can carry an NOL forward indefinitely.

Question 55

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 these.

Question 56

An individual taxpayer who does not itemize deductions uses the standard deduction to compute the excess of nonbusiness deductions over the sum of nonbusiness income and net nonbusiness capital gains for purposes of computing net operating loss.

Question 57

A theft of investment property can create or increase a net operating loss for an individual.

Question 58

Currently, a net operating loss can be carried forward only (no carryback exists).

Question 59

A taxpayer can carry back any NOL incurred for two years and then forward up to 20 years.

Question 60

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 these.

Question 61

Blue Corporation incurred the following expenses in connection with the development of a new product: $$\begin{array} { l r } \text { Salaries } & \$ 100,000 \\\text { Utilities } & 18,000 \\\text { Materials } & 25,000 \\\text { Advertising } & 5,000 \\\text { Market survey } & 3,000 \\\text { Depreciation on machine } & 9,000\end{array}$$ Blue expects to begin selling the product next year.If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year.

A)$0
B)$118,000
C)$143,000
D)$152,000
E)$160,000

Question 62

Last year, Green Corporation incurred the following expenditures in the development of a new plant process: $$\begin{array} { l r } \text { Salaries } & \$ 250,000 \\\text { Materials } & 90,000 \\\text { Utilities } & 20,000 \\\text { Quality control testing costs } & 40,000 \\\text { Management study costs } & 5,000 \\\text { Depreciation of equipment } & 18,000\end{array}$$ During the current year, benefits from the project began being realized in May.If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.

A)$48,000
B)$50,400
C)$54,667
D)$57,067
E)None of these.

Question 63

In 2019, Mary had the following items: $$\begin{array} { l r } \text { Salary } & \$ 30,000 \\\text { Personal use casualty gain } & 10,000 \\\text { Personal use casualty loss (after } \$ 100 \text { floor) } & 17,000 \\\text { Other itemized deductions } & 4,000\end{array}$$ Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2019.

A)$11,650
B)$12,800
C)$13,900
D)$21,900
E)None of these.

Question 64

In 2019, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: $$\begin{array} { l r } \text { Loss from damage to rental property } & ( \$ 6,000 ) \\\text { Loss from theft of bonds } & ( 3,000 ) \\\text { Personal casualty gain } & 4,000 \\\text { Personal casualty loss (after } \$ 100 \text { floor) } & ( 9,000 )\end{array}$$ The personal casualties occurred in a Federally declared disaster area.Determine the amount of Morley's itemized deduction from the losses.

A)$0
B)$2,900
C)$5,120
D)$5,600
E)None of these.

Question 65

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2019.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 he feared 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 these.

Question 66

In 2019, Wally had the following insured personal casualty losses (arising from one casualty in a Federally declared disaster area).Wally also had $42,000 AGI for the year before considering the casualty. $\begin{array}{cccc}&& \underline{\text { FairMarketValue} }\\\underline{\text { Asset }} & \underline{\text { AdjustedBasis }} & \underline{\text { Before }} &\underline{ \text { After }} &\underline{\text { Insurance Recovery }}\\A&\$ 9,200 & \$ 8,000 & \$ 1,000 & \$ 2,000 \\B&3,000 & 4,000 & -0- & 4,000 \\C&3,700 & 1,700 & -0- & 900\end{array}$
Wally's casualty loss deduction is:

A)$1,500.
B)$1,600.
C)$4,800.
D)$58,000.
E)None of these.

Question 67

John had adjusted gross income of $60,000 in 2019.During the year, his personal use summer home was damaged by a fire.Pertinent data with respect to the home follows: $\begin{array} { l r } \text { Cost basis } & \$ 260,000 \\ \text { Value before the fire } & 400,000 \\ \text { Value after the fire } & 100,000 \\ \text { Insurance recovery } & 270,000 \end{array}$

John had an accident with his personal use car. As a result of the accident, He was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:

$\begin{array} { l r } \text { Cost basis } & \$ 80,000 \\ \text { Value before the accident } & 56,000 \\ \text { Value after the accident } & 20,000 \\ \text { Insurance recovery } & 18,000 \end{array}$ What is John's itemized casualty loss deduction?

A)$0
B)$2,000
C)$17,000
D)$18,000
E)None of these.

Question 68

On February 20, 2018, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000.On May 1, 2019, the stock became worthless.During 2019, Bill also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain.How should Bill treat these items on his 2019 tax return?

A)$4,000 long-term capital loss and $9,000 short-term capital loss.
B)$4,000 long-term capital loss and $3,000 short-term capital loss.
C)$8,000 ordinary loss and $3,000 short-term capital loss.
D)$8,000 ordinary loss and $5,000 short-term capital loss.
E)$8,000 long-term capital loss and $6,000 short-term capital loss.

Question 69

Bruce, who is single, had the following items for the current year: ∙ Salary of $80,000.
∙ Gain of $20,000 on the sale of § 1244 stock acquired two years earlier.
∙ Loss of $75,000 on the sale of § 1244 stock acquired three years earlier.
∙ Worthless stock of $15,000.The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year.
Determine Bruce's AGI for the current year.

A)$27,000
B)$38,000
C)$42,000
D)$47,000
E)None of these.

Question 70

Jim had a car accident in 2019 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.He 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 these.

Question 71

In 2019, Grant's personal residence was completely destroyed by fire.He 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: $$\begin{array} { l r } \text { Cost basis } & \$ 280,000 \\\text { Value before casualty } & 250,000 \\\text { Value after casualty } & - 0 -\end{array}$$ What is Grant's allowable casualty loss deduction?

A)$0
B)$6,500
C)$6,900
D)$10,000
E)$80,000

Question 72

On July 20, 2018, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000.On November 10, 2018, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000.On September 15, 2019, Matt sold the 4,000 shares of stock for $120,000.How should Matt treat the sale of the stock on his 2019 return?

A)$54,000 ordinary loss.
B)$100,000 ordinary loss; $46,000 net capital gain.
C)$100,000 ordinary loss; $20,000 STCL.
D)$130,000 ordinary loss; $66,000 LTCG.
E)None of these.

Question 73

Alicia was involved in an automobile accident in 2019.Her car was used 60% for business and 40% for personal use.The car had originally cost $40,000.At the time of the accident, the car was worth $20,000 and Alicia had taken
$8,000 of depreciation.The car was totally destroyed and Alicia had let her car insurance expire.If her AGI is
$50,000 (before considering the loss), determine her AGI and itemized deduction for the casualty loss.

A)$34,000; $-0-.
B)$50,000; $-0-.
C)$34,000; $4,500.
D)$26,000; $5,700.
E)None of these.

Question 74

Regarding research and experimental expenditures, which of the following are not qualified expenditures?

A)Costs of ordinary testing of materials.
B)Costs to develop a plant process.
C)Costs of developing a formula.
D)Depreciation on a building used for research.
E)All of these are qualified expenditures.

Question 75

Alma is in the business of dairy farming.During the year, one of her barns was completely destroyed by fire.The adjusted basis of the barn was $90,000.The fair market value of the barn before the fire was $75,000.The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy.She has adjusted gross income of $40,000 for the year (before considering the casualty).Determine the amount of loss she can deduct on her tax return for the current year.

A)$3,750
B)$14,650
C)$14,750
D)$18,750
E)None of these.

Question 76

On September 3, 2018, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31, 2018, the stock was worth $85,000.On August 15, 2019, Able was notified that the stock was worthless.How should Able report this item on his 2019 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 these.

Question 77

Which of the following events would produce a deductible loss in 2019?

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 these.

Question 78

John files a return as a single taxpayer.In 2019, he had the following items:
? Salary of $40,000.
? Loss of $65,000 on the sale of § 1244 stock acquired two years ago.
? Interest income of $6,000.
Determine John's AGI for 2019.

A)($5,000).
B)$0.
C)$45,000.
D)$51,000.
E)None of these.

Question 79

In 2017, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home.Her insurance company told her that her policy did not cover the theft.In 2017, Sarah's other itemized deductions were $2,000, and she had AGI of $30,000.In February 2019, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000.Determine the tax treatment of the $5,000 received by Sarah during 2019.

A)None of the $5,000 should be included in gross income.
B)$2,900 should be included in gross income.
C)$5,000 should be included in gross income.
D)Last year's return should be amended to include the $5,000.
E)None of these.

Question 80

In the current year, Juan's home was burglarized.He had the following items stolen: ∙ Securities worth $25,000.Juan purchased the securities four years ago for $20,000.
∙ New tools that Juan had purchased two weeks earlier for $8,000.He uses the tools in making repairs at an apartment house that he owns and manages.
∙ An antique worth $15,000.Juan inherited the antique (a family keepsake) when the property was worth $11,000.
Juan's homeowner's policy had a $50,000 deductible clause for thefts.If his salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft.

A)$3,100
B)$6,000
C)$26,100
D)$26,500
E)None of these.