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

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Question 51

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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.

A) True
B) False

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Question 52

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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.

F) A) and D)
G) A) and B)

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Question 53

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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.

Sally is an employee of Blue Corporation. Last year, she purchased a very expensive computer with her own funds. She used the computer 100% for business purposes. During the current year, the computer was completely destroyed in a fire. Blue did not reimburse her for her loss. Discuss whether Sally's loss will create or increase Sally's net operating loss.

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.

Losses on rental property are classified as deductions for AGI.

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.

On June 2, 2018, Fred's TV Sales sold Mark a large HD TV on account for $12,000. Fred's TV Sales uses the accrual method. In 2019, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could not expect to receive any of the amount owed to him. In 2020 final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2020?2019. The loss in 2019 would be $8,000. In 2020, the account has been written down to zero, hence, the collection of $1,000 would produce a $1,000 ($1,000 - $0) gain rather than a loss.

Jose, single, reports the following items for 2019: $\begin{array}{lr}\text { Salary } & \$ 44,000 \\\S 1244 \text { loss on stock acquired 3 years ago } & (70,000) \\\S 1244 \text { gain on stock acquired } 10 \text { months ago } & 26,000 \\\text { Worthless security purchased in June of last year } & (4,000) \\\text { Nonbusiness bad debt } & (7,000) \\\text { Interest income } & 8,000\\\text { Compute Jose's adjusted gross income for } 2019 \text {. }\end{array}$

Julie, who is single, reports the following items for 2019: ? Salary-$100,000. ? A hurricane completely destroyed Julie's duplex during the current year. She lived in one- half of the duplex and rented out the other half. Julie paid $400,000 for the duplex and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex was worth $420,000 at the time of the destruction. Julie's insurance policy paid her 90% of the fair market value of the duplex. After the storm, her county was declared a Federal disaster area. ? Household items destroyed in the hurricane had a basis of $15,000 and a fair market value of $8,500. There was no insurance recovery on the household items. Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the painting was worth $10,000. Julie purchased the painting as an investment with the intent ? that she would sell it when its value exceeded $12,000. There was no insurance recovery on the painting. ? Julie had an automobile accident in the current year. She used the car 100% for personal purposes. The car cost $37,000 and had a decline of $5,000 in FMV as a result of the accident. The car was insured, but the policy had a $2,000 deductible clause. Julie chose not to file a claim for the damage. ? Julie owned a computer that she used 100% for business. The computer was also completely destroyed in the hurricane. It had a basis of $6,000 and an FMV of $4,000 at the time it was destroyed. She was not reimbursed by her employer for the loss on the computer. ? Home mortgage interest-$10,000. Determine the amount of Julie's taxable income for 2019.

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.

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

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.

Maria, who is single, reports the following items for 2019: Salary $80,000 Loss on sale of § 1244 small business stock acquired three years ago (60,000) $\begin{array}{lr}\text { Stock acquired two years ago became worthless during the year } & (5,000) \\\text { Long-term capital gain } & 25,000 \\\text { Nonbusiness bad debt } & (15,000) \\\text { Federal disaster area casualty loss on property held six months } & (6,000) \\\text { Federal disaster area casualty gain on property held four years } & 4,000\end{array}$ Determine Maria's adjusted gross income for 2019.

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

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

Juan, married and filing jointly, reports the following income and deductions for 2019: $\begin{array}{lr}\text { Sales } & \$ 600,000 \\\text { Business expenses } & (650,000) \\\text { Interest income } & 3,000 \\\text { Dividends } & 4,000\\\text {Federal disaster area personal casualty loss (after }&(25,000) \\\text { deducting the \$ 100 floor)}\\\text { Taxes paid on personal residence } & (7,000) \\\text { Interest paid on personal residence } & (9,000) \\\text { Alimony paid } & (18,000)\end{array}$ Juan has three dependent children. Calculate the net operating loss for 2019.

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 taxpayer can carry an NOL forward indefinitely.