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

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Question 1

True/False

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

A) True
B) False

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Question 2

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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 the above

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

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Question 3

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

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

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

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.

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

A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year. Identify factors that should be considered in deciding in which year to take the loss.

Losses on rental property are classified as deductions for AGI.

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2018. 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 of a fear 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?

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 ten 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:

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

Julie, who is single, has the following items for 2018: ? Salary-$100,000. ? A hurricane completely destroyed Julie's duplex during the current year. Julie 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. Julie used the car 100% for personal purposes. The car cost $37,000 and had a decline in FMV as a result of the accident of $5,000. 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 a FMV of $4,000 at the time it was destroyed. Julie 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 2018.

Jed is an electrician. Jed 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?

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

Blue Corporation incurred the following expenses in connection with the development of a new product: 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.

Which of the following events would produce a deductible loss in 2018?

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.

Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.

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