Chapter 7 - Test Bank PDF

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CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses 828. 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 $18,000. How much loss can Peggy deduct and in which year?

829. 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 never able to collect the judgement nor the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year?

830. On June 2, 2010, Fred’s TV Sales sold Mark a large HD TV, on account, for $12,000. Fred’s TV Sales uses the accrual method. In 2011, 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 2012, final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2012?

831. Red Corporation incurred a $15,000 bad debt last year. Red Corporation also had an $9,000 long-term capital gain last year. Red’s taxable income for last year was $100,000. During the current year, Red Corporation, unexpectedly, collected $7,000 on the debt. How should Red Corporation account for the $7,000 collection?

832. Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $87,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected.

833. 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

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses year, Gina had AGI of $60,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends. 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?

834. 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 a cash basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is:

835. 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?

836. On September 3, 2010, Able, a single individual, purchased § 1244 stock in Red Corporation for $60,000. On December 31, 2010, the stock was worth $85,000. On August 15, 2011, Able was notified that the stock was worthless. How should Able report this item on his 2011 tax return?

837. On February 20, 2010, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2011, the stock became worthless. During 2011, 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 2011 tax return?

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses 838. John files a return as a single taxpayer. In 2011, he had the following items: · · ·

Salary of $45,000. Loss of $65,000 on the sale of § 1244 stock acquired two years ago. Interest income of $6,000.

Determine John’s AGI for 2011.

839. Bruce, who is single, had the following items for the current year:

· · · ·

Salary of $90,000. Gain of $30,000 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 $7,000. 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.

840. On July 20, 2009, 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, 2010, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2011, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2011 return?

841. Which of the following events would produce a deductible loss?

842. In 2011, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $48,000 AGI for the year.

Asset A

Adjusted Basis $9,200

Fair Market Value Before After $8,000 $1,000

Insurance Recovery $2,000

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses B C

3,000 3,700

4,000 1,900

–0– –0–

500 800

Wally’s casualty loss deduction is:

843. Jim had a car accident in 2011 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 personal use. Jim 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 $60,000, determine his deductible loss on the car.

844. Norm’s car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2011. 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?

845. In 2011, Grant’s personal residence was damaged by fire. Grant was insured for 90% 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 Value before casualty Value after casualty

What is Grant’s allowable casualty loss deduction?

$170,000 250,000 60,000

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses 846. John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows: Cost basis Value before the fire Value after the fire Insurance recovery

$250,000 400,000 100,000 270,000

John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:

Cost basis Value before the accident Value after the accident Insurance recovery

$80,000 56,000 20,000 18,000

What is John’s itemized casualty loss deduction?

847. In 2011, Mary had the following items: Salary Personal use casualty gain Personal use casualty loss (after $100 floor) Other itemized deductions

$30,000 10,000 17,000 4,000

Assuming that Mary files as head of household (has one dependent child), determine her taxable income for the current year.

848. In 2011, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: Loss from damage to rental property Loss from theft of bonds Personal casualty gain

($6,000) (3,000) 4,000

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses Personal casualty loss (after $100 floor)

(9,000)

Determine the amount of Morley’s itemized deduction from the losses.

849. In 2011, Theo, an employee, had a salary of $30,000 and experienced the following losses:

Loss from damage to rental property Unreimbursed loss from theft of business computer Personal casualty gain Personal casualty loss (after $100 floor)

($10,000) (5,000) 4,000 (3,000)

Determine the amount of Theo’s itemized deduction from these losses.

850. Alicia was involved in an automobile accident in 2011. Her car was used 50% for business and 50% 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 Alicia’s AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss.

851. Last year, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah’s insurance company told her that her policy did not cover the theft. Sarah’s other itemized deductions last year were $10,000. She had AGI of $30,000 last year. In August of the current year, Sarah’s insurance company decided that Sarah’s policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during the current year.

852. 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).

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses Determine the amount of loss she can deduct on her tax return for the current year.

853. In 2011, Juan’s home was burglarized. Juan had the following items stolen: · · ·

Securities worth $25,000. Juan purchased the securities four years ago for $20,000. New tools which Juan had purchased two weeks earlier for $8,000. Juan 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 Juan’s salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft.

854. Regarding research and experimental expenditures, which of the following are not qualified expenditures?

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

Salaries Utilities Materials Advertising Market survey Depreciation on machine

$100,000 18,000 25,000 5,000 3,000 9,000

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. 856. Last year, Green Corporation incurred the following expenditures in the development of a new plant process:

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses

Salaries Materials Utilities Quality control testing costs Management study costs Depreciation of equipment

$200,000 80,000 10,000 30,000 5,000 15,000

During the current year, benefits from the project began being realized in March. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.

857. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $400,000 in 2011. Ivory’s domestic production activities deduction is:

858. For the year 2011, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber’s DPAD for 2011 is:

859. Cream, Inc.’s taxable income for 2011 before any deduction for an NOL carryforward of $30,000 is $70,000. Cream’s qualified production activities income (QPAI) is $60,000. What is the amount of Cream’s domestic production activities deduction (DPAD) for 2011?

860. If a taxpayer has an NOL in 2011 of $20,000, of which $8,000 is attributable to a theft of personal use property, the taxpayer may:

861. Tonya had the following items for last year: Salary Short-term capital gain

$40,000 12,000

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses Nonbusiness bad debt Long-term capital loss

(10,000) (5,000)

For the current year, Tonya had the following items: Salary Collection of last year’s bad debt

$45,000 10,000

Determine Tonya’s adjusted gross income for the current year. Correct Answer: Salary Income under tax benefit rule Long-term capital loss carryover AGI

$45,000 10,000 (3,000) $52,000

Income on collection of nonbusiness bad debt (classified as STCL) to the extent of tax benefit in the prior year ($10,000 offset against shortterm capital gain).

$10,000

862. Maria, who is single, had the following items for 2011: Salary Loss on sale of § 1244 small business stock acquired 3 years ago Stock acquired 2 years ago became worthless during the year Long-term capital gain Nonbusiness bad debt Casualty loss on property held 6 months Casualty gain on property held 4 years

$80,000 (60,000) (5,000) 25,000 (8,000) (4,000) 4,000

Determine Maria’s adjusted gross income for 2011. Correct Answer: Salary Ordinary loss from § 1244 stock Capital gains and losses Long-term capital gain ($25,000 + $4,000) Less: Long-term capital loss

$80,000 (50,000) $29,000

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses [($60,000 – $50,000) + $5,000] (15,000) Net long-term capital gain $14,000 Less: Short-term capital loss ($8,000 + $4,000) (12,000) Capital gain net income Adjusted gross income

(2,000) $32,000

863. Mike, single, age 31, had the following items for 2011: Salary Nonbusiness bad debt Casualties—independent events Asset A (personal use property held for two years)—gain Securities (stolen)—loss Dividends Interest expense on personal residence

$42,000 (4,500) 2,000 (5,000) 1,000 10,000

Compute Mike’s taxable income for 2011. Correct Answer: Salary Dividends Casualty gain (long-term capital gain) $2,000 Nonbusiness bad debt (short-term capital loss) (4,500) Net short-term capital loss Adjusted gross income Less: Interest expense on personal residence Miscellaneous itemized deduction: casualty loss Personal exemption Taxable income

$42,000 1,000 (2,500) $40,500 (10,000) (5,000) (3,700) $21,800

864. Jose, single, had the following items for 2011:

Salary § 1244 loss on stock acquired 3 years ago § 1244 gain on stock acquired 10 months ago Worthless security purchased in June of last year Nonbusiness bad debt

$44,000 (70,000) 26,000 (4,000) (7,000)

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses Interest income

8,000

Compute Jose’s adjusted gross income for 2011.

Correct Answer: Salary Ordinary loss from § 1244 stock Interest income Short-term capital gain Short-term capital loss Net short-term capital gain Long-term loss from § 1244 stock ($70,000 – $50,000) Worthless security Net long-term capital loss Limit Adjusted gross income

$44,000 (50,000) 8,000 $26,000 (7,000) $19,000 ($20,000) (4,000)

(24,000) ($ 5,000)

865. Julie, who is single, has the following items for 2011:

·

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.

·

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.

·

Home mortgage interest – $10,000.

Determine the amount of Julie’s taxable income for 2011.

(2,000) $ –0–

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses

Correct Answer: Salary Plus: Gain on rental duplex Recovery [($420,000 ´ 90%) ´ 50%] Cost (50% ´ 400,000) $200,000 Less: cost recovery (80,000) Adjusted basis Casualty gain AGI Less: Itemized deductions Casualty loss Dwelling Basis ($400,000 ´ 50%) $200,000 Recovery (189,000) Loss $ 11,000 Household items 8,500 Total loss $ 19,500 Less: $100 floor (100) 10% ´ $169,000 (AGI) (16,900) Deductible loss Home mortgage interest Other miscellaneous itemized deduction—painting Total itemized deductions Personal exemption Taxable income

$100,000 $189,000

(120,000) 69,000 $169,000

$ 2,500 10,000 4,000 (16,500) (3,700) $148,800

866. Juanita, single and age 43, had the following items for 2011:

Salary Interest income Casualty loss on long-term business property Casualty loss on rental property Loss on theft of securities Personal casualty gains Personal casualty loss (after $100 floor) Other itemized deductions

$60,000 6,000 (15,000) (5,000) (8,000) 6,000 (13,000) (9,000)

CHAPTER 7 Deductions and Losses: Certain Business Expenses and Losses Compute Juanita’s taxable income for 2011. Correct Answer: Salary Interest income Casualty loss on business property Casualty loss on rental property Personal casualty gains $6,000 Personal casualty loss (6,000) AGI Less: Itemized deductions ...