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

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Question 21

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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.

A) True
B) False

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Question 22

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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 no income for the current year.
C) Report $2,000 of income for the current year.
D) Report $5,000 of income for the current year.
E) None of the above.

F) B) and D)
G) A) and E)

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Question 23

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Beginning in 2018, a personal casualty loss deduction is only allowed for losses occurring in a Federally-declared disaster area.

In 2018, personal casualty gains are allowed to offset personal casualty losses. If an excess casualty loss results, it is not deductible unless attributable to a Federally-declared disaster).

The excess of nonbusiness capital gains over nonbusiness capital losses must be added to taxable income to compute the net operating loss of an individual.

A theft of investment property can create or increase a net operating loss for an individual.

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

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.

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2018. 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?

The excess business loss rule applies to partnerships and S corporations rather than partners and shareholders).

If personal casualty gains exceed personal casualty losses after deducting the $100 floor), there is no itemized deduction.

A father cannot claim a loss on his daughter's rental use property.

The amount of a business loss cannot exceed the amount of the taxpayer's NOL for the taxable year.

A reimbursed employee business expense cannot create an NOL for an individual.

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.

In determining whether a debt is a business or nonbusiness bad debt, the debtor's use of the borrowed funds is important.

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

Jose, single, had the following items for 2018: $\begin{array}{lr}\text { Salary } & \$ 44,000 \\\S 1244 \text { loss on stock acquired } 3 \text { years ago } & (70,000) \\\S 1244 \text { gain on stock acquired } 10 \text { months ago } & 26,000 \\\text { Worthless security purchased in June of last year } & (4,000) \\\text { Nonbusiness bad debt } & (7,000) \\\text { Interest income } & 8,000\\\text { Compute Jose's adjusted gross income for } 2018 \end{array}$

A bona fide debt cannot arise on a loan between father and son.