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

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Question 21

Multiple Choice

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Which of the following events would produce a deductible loss?

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 automobile resulting from a taxpayer's willful negligence.
D) A misplaced diamond ring.
E) None of the above.

F) A) and B)
G) C) and D)

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Question 22

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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
B) False

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Question 23

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Last year,Amos had AGI of $50,000.Amos also had a diamond ring stolen which cost $20,000 and was worth $17,000 at the time of the theft.He itemized deductions on last year's tax return.In the current year,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.

Why was the domestic production activities deduction (DPAD) enacted by Congress?

The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer.

Julie,who is single,has the following items for 2015: ∙ 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. ∙ ​ ​ ​ Julie had an automobile accident in the current year.Julie used the car 100% for personal purposes.The car cost $37,000 and had a decline in FMV as a result of the accident of $5,000.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 a FMV of $4,000 at the time it was destroyed.Julie 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 2015. ​

On February 20,2014,Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000.On May 1,2015,the stock became worthless.During 2015,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 2015 tax return?

In 2014,Robin Corporation incurred the following expenditures in connection with the development of a new product: Salaries $100,000 Supplies 40,000 Market survey 10,000 Depreciation 25,000 In 2015,Robin incurred the following additional expenditures in connection with the development of the product: Salaries $125,000 Supplies 50,000 Depreciation 30,000 Advertising 10,000 In October 2015,Robin began receiving benefits from the project.If Robin elects to expense research and experimental expenditures,determine the amount and year of the deduction.

The current position of the IRS is that a personal casualty loss deduction is not allowed for losses resulting from termites.

A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.

Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business.

If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than it's adjusted basis,a gain is recognized.

Green,Inc. ,manufactures and sells widgets.During the current year,an examination of the company records showed the following items: Domestic production gross receipts $3,000,000 Cost of goods sold for domestic products 750,000 Expenses directly related to domestic production gross receipts (other than wages) 300,000 W-2 wages paid to employees engaged in qualified domestic production activities 300,000 Ratable portion of other expenses 100,000 Total W-2 wages 325,000 Taxable income 1,600,000 Determine Green's domestic production activities deduction for the current year.

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 theft loss is taken in the year of the theft.

On June 2,2014,Fred's TV Sales sold Mark a large HD TV,on account,for $12,000.Fred's TV Sales uses the accrual method.In 2015,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 2016,final settlement was made and Fred received $1,000.How much bad debt loss can Fred deduct in 2016?

A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency.

Blue Corporation incurred the following expenses in connection with the development of a new product: Salaries $100,000 Utilities 18,000 Materials 25,000 Advertising 5,000 Market survey 3,000 Depreciation on machine 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.

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.

Norm's car,which he uses 100% for personal purposes,was completely destroyed in an accident in 2015.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?