Deck 6: Losses and Loss Limitations

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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 6

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.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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 18

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 19

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 20

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 21

Losses on rental property are classified as deductions for AGI.

Question 22

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

Question 23

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

Question 24

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 25

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 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

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 34

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 35

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

Question 36

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 37

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

Question 38

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 39

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 40

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 41

Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year.During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations.Jack's at-risk amount at the end of the year is $44,000.

Question 42

Wolf Corporation has active income of $55,000 and a passive activity loss of $33,000 in the current year.Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

Question 43

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Question 44

Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Gray is not a personal service corporation, it may deduct $34,000 of the passive activity loss.

Question 45

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

Question 46

Nonbusiness income for net operating loss purposes includes dividends received.

Question 47

Aram owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year.The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year.Her at-risk amount at the end of the year is $43,000.

Question 48

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

Question 49

Oriole Corporation has active income of $45,000 and a passive activity loss of $23,000 in the current year.Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.

Question 50

Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective, Linda will be better off if Activity A is not passive.

Question 51

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

Question 52

Jackson Company incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Jackson is a personal service corporation, it may deduct $34,000 of the passive activity loss.

Question 53

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

Question 54

A taxpayer can carry an NOL forward indefinitely.

Question 55

Dick participates in an activity for 90 hours during the year.He has no employees and there are no other participants.Dick is a material participant.

Question 56

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive activity loss of $44,000.The activity was sold at a loss and Kelly has no other passive activities.The suspended loss is not deductible.

Question 57

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk.If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

Question 58

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

Question 59

In the current year, Don has a $55,000 loss from a business he owns.His at-risk amount at the end of the year, prior to considering the current-year loss, is $36,000.He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business.

Question 60

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

Question 61

Individuals can deduct from active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

Question 62

Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active.

Question 63

Bruce owns a small apartment building that produces a $25,000 loss during the year.His AGI before considering the rental loss is $85,000.Bruce must be a material participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.

Question 64

From January through November, Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest.The partnership has four full-time employees.During December, Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards.Vern qualifies as a material participant.

Question 65

Mary Jane participates for 100 hours during the year in an activity she owns.She has no employees and is the only participant in the activity.The activity is a significant participation activity.

Question 66

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.

Question 67

In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner.If she is an active participant and if her modified AGI is $100,000 or less, she can deduct $25,000 of the loss.

Question 68

If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort, any loss from that activity is treated as an active loss that can offset active income.

Question 69

A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity.

Question 70

Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her spouse participates for 450 hours.Joyce qualifies as a material participant.

Question 71

Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.

Question 72

Tomas participates for 300 hours in Activity A and 250 hours in Activity B, both of which are nonrental businesses. Both activities are active.

Question 73

When determining whether an individual is a material participant, participation by an owner's spouse generally counts.

Question 74

Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year.Her modified AGI is $125,000 from an active business.Disregarding any at-risk amount limitation, she may deduct $25,000 of the loss this year, and the remaining $25,000 is a suspended passive activity loss.

Question 75

Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

Question 76

Wayne owns a small apartment building that produces a $45,000 loss during the year.His AGI before considering the rental loss is $85,000.Because Wayne is an active participant with respect to the rental activity, he may deduct the $45,000 loss.

Question 77

Roger owns and actively participates in the operations of an apartment building that produces a $40,000 loss during the year.He has AGI of $150,000 from an active business.He may deduct $25,000 of the loss.

Question 78

Carlos receives a gift of a passive activity from his father whose basis is $60,000.Suspended losses related to the activity are $18,000.Carlos will be allowed to offset the $18,000 suspended losses against future passive activity income.

Question 79

Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000.All of the $80,000 passive activity loss can be deducted on Kim's final income tax return.

Question 80

A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.