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

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Question 31

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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.

A) True
B) False

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Question 32

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

A) True
B) False

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Question 33

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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.

In 2019, Grant's personal residence was completely destroyed by fire.He 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: $\begin{array} { l r } \text { Cost basis } & \$ 280,000 \\\text { Value before casualty } & 250,000 \\\text { Value after casualty } & - 0 -\end{array}$ What is Grant's allowable casualty loss deduction?

John files a return as a single taxpayer.In 2019, he had the following items: ? Salary of $40,000. ? Loss of $65,000 on the sale of § 1244 stock acquired two years ago. ? Interest income of $6,000. Determine John's AGI for 2019.

Nonbusiness income for net operating loss purposes includes dividends received.

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

Currently, a net operating loss can be carried forward only and can offset no more than 80% of taxable income in a subsequent year.

Mike, single, age 31, reports the following items for 2019: $\begin{array}{lr}\text { Salary } & \$ 50,000 \\\text { Nonbusiness bad debt } & (6,000)\\\text { Casualty }\\ \text { Asset A (personal use property held for two years) —gain } & 3,000 \\\text { Dividends } & 2,000 \\\text { Interest expense on personal residence } & 10,000\end{array}$ $\text { Compute Mike's taxable income for } 2019 .$

Discuss the effect of alimony in computing an NOL.

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.

On September 3, 2018, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31, 2018, the stock was worth $85,000.On August 15, 2019, Able was notified that the stock was worthless.How should Able report this item on his 2019 tax return?

Jed is an electrician.He 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?

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:

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.

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

An individual taxpayer who does not itemize deductions uses the standard deduction to compute the excess of nonbusiness deductions over the sum of nonbusiness income and net nonbusiness capital gains for purposes of computing net operating loss.

Last year, Green Corporation incurred the following expenditures in the development of a new plant process: $\begin{array} { l r } \text { Salaries } & \$ 250,000 \\\text { Materials } & 90,000 \\\text { Utilities } & 20,000 \\\text { Quality control testing costs } & 40,000 \\\text { Management study costs } & 5,000 \\\text { Depreciation of equipment } & 18,000\end{array}$ 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.

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

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.