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Exam 6: Losses and Loss Limitations

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Question 91

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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.

A) True
B) False

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Question 92

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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.

A) True
B) False

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Question 93

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Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business.

Describe the types of activities and taxpayers that are subject to the at-risk rules.

Gary, who is an employee of Red Corporation, has the following items for 2018:

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

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?

Vail owns interests in a beauty salon, a natural foods store, and a tanning salon.Several full-time employees work at each of the enterprises.As of the end of November of the current year, Vail has worked 180 hours in the beauty salon, 220 hours at the natural foods store, and 80 hours at the tanning salon.These three ventures collectively will produce income.Vail also owns one other passive activity that is producing a loss a limited partnership in which she has reported no participation).How should Vail plan her activities for the remainder of the year?

Josh has investments in two passive activities.Activity A acquired three years ago) produces income of $30,000 this year, while Activity B acquired two years ago) produces a loss of $50,000.What is the amount of Josh's suspended loss for the year?

Susan has the following items for 2018: ? Loss on rental property caused by termites-$110,000.Insurance covered 80% of the loss. ? Loss on personal use automobile-$10,000.The insurance policy does not cover the first $3,000 of loss.Susan decided not to file a claim for the loss. ? Loss on a painting stolen from Susan's house.Susan purchased the painting three years ago as an investment.She paid $40,000 for the painting and it was worth $35,000 at the time of the theft.The painting was insured for the fair market value. ? Salary-$40,000. Determine Susan's AGI and total amount of itemized deductions for 2018.

Jed spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that he owns at a resort community.He also owns a music store in another city that is operated by a full-time employee.He elects not to group them together as a single activity under the "appropriate economic unit" standard.Jed spends 40 hours per year working at the music store.

List the taxpayers that are subject to the passive activity loss rules and summarize the general impact of these rules on these taxpayers.

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

George, an ophthalmologist, owns a separate business not real estate) in which he participates.He has one employee who works part-time in the business.Which of the following statements is correct?

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

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.

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?

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.

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.

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.