Question 1

Which of the following events would produce a deductible loss?

Accepted Answer

Losses due to erosion, termite infestation, willful negligence, or misplacement of personal items are not deductible under the tax code. Deductible losses typically must be sudden, unexpected, or unusual in nature.

Question 2

Mary incurred a $20,000 nonbusiness bad debt last year.She also had an $8,000 long-term capital gain last year.Her taxable income for last year was an NOL of $15,000.During the current year, she unexpectedly collected $12,000 on the debt.How should Mary account for the collection?

Accepted Answer

The answer of Mary incurred a $20,000 nonbusiness bad debt...

Question 3

On February 20, 2016, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000.On May 1, 2017, the stock became worthless.During 2017, 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 2017 tax return?

Accepted Answer

- The loss on Pink Corporation stock is a capital loss. Since the stock was held for over one year, it is a long-term capital loss. The loss is the full $1,000 that was originally paid for the stock.
- The loss on the nonbusiness bad debt is also a capital loss, but since it is not a business bad debt, it is not treated as an ordinary loss. It is a short-term capital loss since it was not held for more than one year. The loss is the full $9,000.
- The loss on the § 1244 small business stock is an ordinary loss since it is § 1244 stock. The loss is limited to $50,000 per year ($100,000 for married filing jointly). Since the loss is only $8,000, the full amount of the loss can be taken as an ordinary loss.
- The long-term capital gain of $5,000 can be used to offset some of the capital losses. However, since the total amount of capital losses exceeds the capital gain, only $3,000 of the capital losses can be used to offset ordinary income. The remaining $3,000 of capital losses is carried forward to future tax years.

Therefore, the total loss for 2017 is:
- $1,000 long-term capital loss from Pink Corporation
- $9,000 short-term capital loss from nonbusiness bad debt
- $8,000 ordinary loss from § 1244 small business stock
- $3,000 short-term capital loss from excess capital losses over gains.

This results in a $8,000 ordinary loss and a $3,000 short-term capital loss. Answer choice C is the only option that matches this result.

Question 4

John files a return as a single taxpayer.In 2017, 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 2017.

Accepted Answer

The answer of John files a return as a single...

Question 5

Jim had a car accident in 2017 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.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.

Accepted Answer

The deductible loss is calculated as the smaller of the decrease in fair market value (FMV) or the adjusted basis, minus any insurance recovery. Here, the FMV decrease is $30,000 (the value of the car at the time of the accident), and the adjusted basis is $40,000. The insurance recovery is 70% of $30,000, which is $21,000. The loss before insurance is $30,000 (FMV decrease) since it's smaller than the adjusted basis. After subtracting the insurance recovery, the loss is $9,000 ($30,000 - $21,000). However, because the car was used 100% for business, the entire loss is deductible against business income, and there's no need to consider the AGI limitation for personal casualty losses. Therefore, none of the provided options accurately reflects the deductible loss.

Question 6

On September 3, 2016, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31, 2016, the stock was worth $85,000.On August 15, 2017, Able was notified that the stock was worthless.How should Able report this item on his 2017 tax return?

Accepted Answer

The answer of On September 3, 2016, Able, a single...

Question 7

On June 2, 2016, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000.Fred's TV Sales uses the accrual method.In 2017, 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 2018, final settlement was made and Fred received $1,000.How much bad debt loss can Fred deduct in 2018?

Accepted Answer

The answer of On June 2, 2016, Fred's TV Sales...

Question 8

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?

Accepted Answer

Since no further payments will be received on the note, Hank's Auto can claim a bad debt deduction for the remaining balance of $15,500 on their current year tax return.

Question 9

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.

Accepted Answer

The answer of Last year, Lucy purchased a $100,000 account...

Question 10

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?

Accepted Answer

The answer of Peggy is in the business of factoring...

Question 11

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:

Accepted Answer

The answer of Five years ago, Tom loaned his son...

Question 12

Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000.All of the $80,000 passive activity loss can be deducted on Kim's final income tax return.

Accepted Answer

The suspended passive activity losses can generally be deducted in full in the year of the taxpayer's death, but they are deducted on the estate's income tax return, not on the decedent's final income tax return.

Question 13

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?

Accepted Answer

Jed incurred a loss of $5,000 ($15,000 billed - $10,000 paid by Alison) and was only able to collect $2,000 from the judgement. Therefore, he can deduct the remaining loss of $3,000 in the current year as a business bad debt.

Question 14

On July 20, 2016, 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, 2016, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000.On September 15, 2017, Matt sold the 4,000 shares of stock for $120,000.How should Matt treat the sale of the stock on his 2017 return?

Accepted Answer

The sale of § 1244 stock allows for ordinary loss treatment on the disposition of small business stock. However, the ordinary loss deduction is limited to $50,000 ($100,000 on a joint return). The first 3,000 shares purchased for $24,000 qualify for § 1244 treatment. The additional 1,000 shares purchased for $150,000 do not qualify for § 1244 treatment because they were purchased from a friend, not directly from the corporation, and thus are treated as a capital asset. The total loss on the sale is $54,000 ($174,000 cost - $120,000 sale proceeds). The $24,000 loss on the § 1244 stock is treated as an ordinary loss, and the remaining $30,000 loss ($54,000 total loss - $24,000 § 1244 loss) on the non-§ 1244 stock is treated as a capital loss. Therefore, none of the provided options accurately describe the treatment of the loss.

Question 15

Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year.Her modified AGI is $125,000 from an active business.Disregarding any at-risk amount limitation, she may deduct $25,000 of the loss, and the remaining $25,000 is a suspended passive activity loss.

Accepted Answer

The answer of Lucy owns and actively participates in the...

Question 16

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.

Accepted Answer

The answer of Bruce, who is single, had the following...

Question 17

Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year.He has AGI of $150,000 from an active business.He may deduct $25,000 of the loss.

Accepted Answer

The answer of Roger owns and actively participates in the...

Question 18

Chris receives a gift of a passive activity from his father whose basis was $60,000.Suspended losses related to the activity are $18,000.Chris will be allowed to offset the $18,000 suspended losses against future passive activity income.

Accepted Answer

The answer of Chris receives a gift of a passive...

Question 19

In 2017, Wally had the following insured personal casualty losses (arising from one casualty).Wally also had $42,000 AGI for the year before considering the casualty. $\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\underline{\text { Fair Market Value }}$
$\begin{array}{ccccc}
\text { Asset } & \text { Adjusted Basis }& \text { Before } &\text { After }& \text { Insurance Recovery }\
\hline\text { A } & \$ 9,200 & \$ 8,000 & \$ 1,000 & \$ 2,000 \
\text { B } & 3,000 & 4,000 & -0- & 4,000 \
\text { C } & 3,700 & 1,700 & -0- & 900
\end{array}$ Wally's casualty loss deduction is:

Accepted Answer

The calculation of Wally's casualty loss deduction involves determining the decrease in fair market value (FMV) of each asset due to the casualty, subtracting any insurance recovery, and then applying the tax rules for personal casualty losses. For each asset, the loss is the lesser of the adjusted basis or the decrease in FMV, minus insurance recovery. However, starting in 2018, under the Tax Cuts and Jobs Act, personal casualty losses are deductible only to the extent they are attributable to a federally declared disaster. Since this scenario is for 2017, we calculate the loss as follows but remember the rules might have changed:- Asset A: Decrease in FMV is $7,000 ($8,000 - $1,000), insurance recovery is $2,000, so the loss is $5,000. However, since the adjusted basis ($9,200) is higher, we use the decrease in FMV minus insurance recovery = $5,000 - $2,000 = $3,000.- Asset B: Decrease in FMV is $4,000 ($4,000 - $0), insurance recovery is $4,000, so the loss is $0 after insurance recovery.- Asset C: Decrease in FMV is $1,700 ($1,700 - $0), insurance recovery is $900, so the loss is $800 ($1,700 - $900).Adding the losses: $3,000 (A) + $0 (B) + $800 (C) = $3,800. However, personal casualty losses must be reduced by $100 per event and then further reduced by 10% of AGI ($42,000). Thus, the calculation would be $3,800 - $100 = $3,700 - ($42,000 * 10%) = $3,700 - $4,200, which would result in no deductible loss because the reduction exceeds the calculated loss. Therefore, none of the provided options accurately reflects the correct calculation based on the given information and the tax rules applicable to 2017.

Question 20

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 a negative $6,000 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?

Accepted Answer

The answer of Two years ago, Gina loaned Tom $50,000.Tom...

Quiz 6: Losses and Loss Limitations