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

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Question 31

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

A) True
B) False

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Question 32

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Losses on rental property are classified as deductions for AGI.

A) True
B) False

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Question 33

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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. Alma has adjusted gross income for the year of $40,000 (before considering the casualty) . Determine the amount of loss she can deduct on her tax return for the current year.

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

In 2014, Grant's personal residence was completely destroyed by fire. Grant 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: Cost basis $280,000 Value before casualty 250,000 Value after casualty -0- What is Grant's allowable casualty loss deduction?

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:

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

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

Last year, Green Corporation incurred the following expenditures in the development of a new plant process: $\begin{array}{lr}\text { Salaries } & \$ 250,000 \\\text { Materials } & 90,000 \\\text { Utilities } & 20,000 \\\text { Quality control testing costs } & 40,000 \\\text { Management study costs } & 5,000 \\\text { Depreciation of equipment } & 15,000\end{array}$ 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.

On February 20, 2013, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2014, the stock became worthless. During 2014, 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 2014 tax return?

While Susan was on vacation during the current year, someone broke into her home and stole the following items: -A computer used 60% in connection with Susan's employment as an employee and 40% for her personal use. The cost of the computer was $8,000. Depreciation of $3,000 had been taken on the computer and it had a fair market value of $4,000 at the time of the theft. -A painting, which Susan purchased as an investment for $10,000, had a fair market value of $17,000. -Silverware purchased for $3,000 had a fair market value of $5,000. ∙ Cash of $30,000. Susan's adjusted gross income, before considering any of the above items, is $60,000. Determine the total amount of Susan's itemized deductions resulting from the theft.

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.

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

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.

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.

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 Corporation did not reimburse her for her loss. Discuss whether Sally's loss will create or increase Sally's net operating loss.

Taxpayer's home was destroyed by a storm in the current year and the area was declared a 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 farming NOL may be carried back 2 years.

Juanita, single and age 43, had the following items for 2014: $\begin{array}{lr}\text { Salary } & \$ 60,000 \\\text { Interest income } & 6,000 \\\text { Casualty loss on business property } & (15,000) \\\text { Casualty loss on rental property } & (5,000) \\\text { Loss on theft of securities } & (8,000) \\\text { Personal casualty gains } & 9,000 \\\text { Personal casualty loss (after } \$ 100 \text { floor) } & (13,000) \\\text { Other itemized deductions } & (9,000)\end{array}$ Compute Juanita's taxable income for 2014.