Ch 7 - South Western Federal Taxation 2021 individual income-taxes 44th edition Testbank PDF

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Chapter 07 Deductions and Losses Certain Business Expenses and Losses - South Western Federal Taxation 2021 individual income-taxes 44th edition Testbank - Professor Joseph Callaghan...

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses True / False 1. 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. a. True b. Fals e ANSWER: Fals e 2. 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. a. True b. Fals e ANSWER: True 3. Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income. a. True b. Fals e ANSWER: Fals e 4. A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency. a. True b. Fals e ANSWER: True 5. 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. a. True b. Fals e ANSWER: True 6. A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless. a. True b. Fals e ANSWER: Fals Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses e 7. 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. Fals e ANSWER: Fals e 8. 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. Fals e ANSWER: Fals e 9. A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction. a. True b. Fals e ANSWER: Fals e 10. A nonbusiness bad debt can offset an unlimited amount of long-term capital gain. a. True b. Fals e ANSWER: True 11. The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined. a. True b. Fals e ANSWER: Fals e 12. A bona fide debt cannot arise on a loan between father and son. a. True b. Fals e ANSWER: Fals e Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses 13. A bond held by an investor that is uncollectible will be treated as a worthless security and, hence, produce a capital loss. a. True b. Fals e ANSWER: True 14. A loss from a worthless security is always treated as a short-term capital loss. a. True b. Fals e ANSWER: Fals e 15. A loss is not allowed for a security that declines in value. a. True b. Fals e ANSWER: True 16. Several years ago, John purchased 2,000 shares of Red Corporation's § 1244 stock from Mark for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining Red Corporation stock for $3,000. John has a $17,000 ($3,000 – $20,000) ordinary loss for the current year. a. True b. Fals e ANSWER: Fals e 17. If a taxpayer sells her or his § 1244 stock at a loss, all of the loss will be ordinary loss. a. True b. Fals e ANSWER: Fals e 18. 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. a. True b. Fals e ANSWER: Fals e 19. An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses b. Fals e ANSWER: True 20. Other casualty means casualties similar to those associated with fires, storms, or shipwrecks. a. True b. Fals e ANSWER: True 21. A father cannot claim a loss on his daughter’s rental use property. a. True b. Fals e ANSWER: True 22. Currently, a personal casualty loss deduction is allowed only for losses occurring in a Federally declared disaster area. a. True b. Fals e ANSWER: True 23. If the amount of the insurance recovery for a theft of business property is greater than the asset’s fair market value (FMV) but less than its adjusted basis, a gain is recognized. a. True b. Fals e ANSWER: Fals e 24. A business theft loss is taken in the year of the theft. a. True b. Fals e ANSWER: Fals e 25. In 2017, Amos had AGI of $50,000. In December 2017, Amos also had a diamond ring stolen that cost $20,000 and was worth $17,000 at the time of the theft. He itemized deductions on his 2017 tax return. In 2020, after a variety of investigations, Amos recovered $17,000 from the insurance company. Therefore, he must include $11,900 in gross income on the tax return for the current year. a. True b. Fals e ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses 26. 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. a. True b. Fals e ANSWER: Fals e 27. The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property. a. True b. Fals e ANSWER: Fals e 28. 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. Fals e ANSWER: Fals e 29. The amount of loss for partial destruction of business property is the decline in fair market value of the business property. a. True b. Fals e ANSWER: Fals e 30. If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized deduction. a. True b. Fals e ANSWER: True 31. The amount of a loss on insured personal use property is reduced by the insurance coverage even if no claim is made against the insurer. a. True b. Fals e ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses 32. Losses on rental property are classified as deductions for AGI. a. True b. Fals e ANSWER: True 33. 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. Fals e ANSWER: Fals e 34. A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor. a. True b. Fals e ANSWER: True 35. Personal casualty gains are allowed to offset personal casualty losses. Currently, if an excess casualty loss results, it is not deductible unless attributable to a Federally declared disaster. a. True b. Fals e ANSWER: True 36. Research and experimental expenditures do not include the cost of consumer surveys. a. True b. Fals e ANSWER: True 37. The cost of depreciable property is not a research and experimental expenditure. a. True b. Fals e ANSWER: True 38. 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. Fals e ANSWER: Fals Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses e 39. If a noncorporate taxpayer has an excess business loss for the year, it is not allowed. a. True b. Fals e ANSWER: True 40. The purpose of the excess business loss rules is to limit the amount of nonbusiness income (e.g., salaries, interest, dividends) that can be sheltered from tax as a result of business losses. a. True b. Fals e ANSWER: True 41. The excess business loss rule applies to partnerships and S corporations (rather than partners and shareholders). a. True b. Fals e ANSWER: Fals e 42. Currently, a net operating loss can be carried forward only (no carryback exists). a. True b. Fals e ANSWER: True 43. Currently, a net operating loss can be carried forward only and can offset no more than 80% of taxable income in a subsequent year. a. True b. Fals e ANSWER: True 44. A reimbursed employee business expense cannot create a NOL for an individual. a. True b. Fals e ANSWER: True 45. A taxpayer can carry back any NOL incurred for two years and then forward up to 20 years. a. True b. Fals e Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses ANSWER: Fals e 46. A taxpayer can carry an NOL forward indefinitely. a. True b. Fals e ANSWER: True 47. The amount of a business loss cannot exceed the amount of the taxpayer’s NOL for the taxable year. a. True b. Fals e ANSWER: Fals e 48. Nonbusiness income for net operating loss purposes includes dividends received. a. True b. Fals e ANSWER: True 49. A theft of investment property can create or increase a net operating loss for an individual. a. True b. Fals e ANSWER: True 50. An NOL carryforward is used in determining the current-year’s charitable contribution deduction. a. True b. Fals e ANSWER: True 51. The excess of nonbusiness capital gains over nonbusiness capital losses must be added to taxable income to compute an individual's net operating loss. a. True b. Fals e ANSWER: Fals e 52. 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. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses b. Fals e ANSWER: True 53. When a net operating loss is carried forward, it can affect the medical expense deduction of that year. a. True b. Fals e ANSWER: True Multiple Choice 54. Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year? a. $-0- for the current year. b. $5,000 for the prior year and $5,000 for the current year. c. $5,000 for the prior year. d. $5,000 for the current year. ANSWER: a 55. 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? a. $0 b. $2,000 c. $3,000 d. $5,000 ANSWER: c 56. On June 2, 2019, Fred’s TV Sales sold Mark a large HD TV on account for $12,000. Fred’s TV Sales uses the accrual method. In 2020, 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 2021 final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2021? a. $0 b. $7,000 c. $8,000 d. $12,000 ANSWER: a 57. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses b. $8,000 income c. $11,000 income d. $12,000 income ANSWER: d 58. 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. $7,000 gain b. $2,000 gain c. $3,000 loss d. $13,000 loss ANSWER: a 59. 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? a. File an amended tax return for last year. b. Report $2,000 of income for the current year. c. Report $5,000 of income for the current year. d. Report $13,000 of income for the current year. ANSWER: d 60. 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. No deduction. b. $3,000 deduction. c. $20,000 deduction. d. $21,800 deduction. ANSWER: b 61. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank’s Auto. As partial payment for the car, the dealer accepted the note from Sharon’s sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharon’s sister died. Hank’s Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is the amount of loss with respect to the note that Hank’s Auto may claim on the current year tax return? a. $0 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses b. $3,000 c. $15,500 d. $18,000 ANSWER: c 62. 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, 2020, Able was notified that the stock was worthless. How should Able report this item on his 2020 tax return? a. $85,000 capital loss. b. $85,000 ordinary loss. c. $60,000 ordinary loss. d. $60,000 capital loss. ANSWER: d 63. On February 20, 2019, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2020, the stock became worthless. During 2020, 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 2020 tax return? a. $4,000 long-term capital loss and $9,000 short-term capital loss. b. $4,000 long-term capital loss and $3,000 short-term capital loss. c. $8,000 ordinary loss and $3,000 short-term capital loss. d. $8,000 ordinary loss and $5,000 short-term capital loss. ANSWER: c 64. John files a return as a single taxpayer. In 2020, 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 2020. a. ($5,000). b. $0. c. $45,000. d. $51,000. ANSWER: b 65. 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.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses Determine Bruce’s AGI for the current year. a. $27,000 b. $38,000 c. $42,000 d. $47,000 ANSWER: a 66. On July 20, 2019, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000. On November 10, 2019, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2020, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2020 return? a. $54,000 STCL. b. $100,000 ordinary loss; $46,000 net capital gain. c. $100,000 ordinary loss; $20,000 STCL. d. $130,000 ordinary loss; $66,000 LTCG. ANSWER: a 67. Which of the following events would produce a deductible loss in 2020? a. Erosion of personal use land due to rain or wind. b. Termite infestation of a personal residence over a several year period. c. Damages to personal residence from hurricane in a Federal disaster area.. d. A misplaced diamond ring. ANSWER: c 68. In 2020, Wally had the following insured personal casualty losses (arising from one casualty in a Federally declared disaster area). Wally also had $42,000 AGI for the year before considering the casualty.

Asset Adjusted Basis A $9,200 B 3,000 C 3,700 Wally’s casualty loss deduction is: a. $500. b. $1,600. c. $4,700. d. $4,800. ANSWER: a

Fair Market Value Before After $8,000 $1,000 4,000 -01,700 -0-

Insurance Recovery $2,000 4,000 900

69. Jim had a car accident in 2020 in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for business use. He received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim’s AGI for the year is Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Deductions and Losses: Certain Business Expenses and Losses $60,000, determine his deductible loss on the car. a. $900 b. $2,900 c. $3,000 d. $19,000 ANSWER: d 70. Norm’s car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2020. 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 he feared 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? a. $0 b. ...