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

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Question 21

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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:

A) No deduction.
B) $3,000 deduction.
C) $20,000 deduction.
D) $21,800 deduction.
E) None of the above.

F) A) and E)
G) All of the above

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Question 22

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Jim had a car accident in 2012 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.

A) $900.
B) $2,900.
C) $3,000.
D) $9,000.
E) None of the above.

F) None of the above
G) A) and E)

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Question 23

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Discuss the effect of alimony in computing a net operating loss.

A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year.Identify factors that should be considered in deciding in which year to take the loss.

A bond held by an investor that is uncollectible will be treated as a worthless security and hence,produce a bad debt.

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.

Bruce,who is single,had the following items for the current year: Determine Bruce's AGI for the current year.

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?

The domestic production activities deduction (DPAD)for 2012 cannot exceed 50% of all W-2 wages paid to employees by the taxpayer during the tax year.

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?

Discuss the treatment,including the carryback and carryforward periods,of casualty losses incurred with personal use property.

On June 2,2011,Fred's TV Sales sold Mark a large HD TV,on account,for $12,000.Fred's TV Sales uses the accrual method.In 2012,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 2013,final settlement was made and Fred received $1,000.How much bad debt loss can Fred deduct in 2013?

For tax years beginning in 2012,the domestic production activities deduction (DPAD)for a sole proprietor is calculated by multiplying 9% times adjusted gross income.

Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback year.

In determining whether a debt is a business or nonbusiness bad debt,the debtor's use of the borrowed funds is not important.

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

Discuss the calculation of nonbusiness deductions for purposes of determining an individual's NOL.

A loss is not allowed for a security that declines in value.

Several years ago,John purchased 2,000 shares of Red Corporation § 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.

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.