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

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Question 21

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Tonya reports the following items for last year: $\begin{array}{lr}\text { Salary } & \$ 40,000 \\\text { Short-term capital gain } & 12,000 \\\text { Nonbusiness bad debt } & (23,000) \\\text { Long-term capital gain } & 8,000\\\text { For the currentyear. Tonya rep orts the following items: }\\\text { Salary } & \$ 45,000 \\\text { Collection of last year's bad debt } & 23,000\end{array}$ Determine Tonya's adjusted gross income for the current year.

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Question 22

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Last year, Green Corporation incurred the following expenditures in the development of a new plant process: $\begin{array} { l r } \text { Salaries } & \$ 250,000 \\\text { Materials } & 90,000 \\\text { Utilities } & 20,000 \\\text { Quality control testing costs } & 40,000 \\\text { Management study costs } & 5,000 \\\text { Depreciation of equipment } & 18,000\end{array}$ During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.

A) $48,000
B) $50,400
C) $54,667
D) $57,067
E) None of these.

F) B) and C)
G) None of the above

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Question 23

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

The purpose of the excess business loss rules is to limit the amount of nonbusiness income (e.g., salaries, interest, dividends) that can be sheltered from tax as a result of business losses.

Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $18,000 long-term capital gain last year. Her taxable income for last year was $25,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection?

The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.

On February 20, 2018, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2019, the stock became worthless. During 2019, 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 2019 tax return?

A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.

In 2019, Theo, a single taxpayer, operates a sole proprietorship in which he materially participates. His proprietorship generates gross income of $320,000 and deductions of $600,000, resulting is a loss of $280,000. The large deductions are due to the acquisition of equipment and the use of immediate expense and additional first-year depreciation to deduct all of the acquisitions. What is Theo's excess business loss for the year?

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

A business bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless.

If a taxpayer sells her or his § 1244 stock at a loss, all of the loss will be ordinary loss.

Research and experimental expenditures do not include the cost of consumer surveys.

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?

Currently, a net operating loss can be carried forward only and can offset no more than 80% of taxable income in a subsequent year.

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

In 2017, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Her insurance company told her that her policy did not cover the theft. In 2017, Sarah's other itemized deductions were $2,000, and she had AGI of $30,000. In February 2019, 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 2019.

On July 20, 2018, 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, 2018, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2019, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2019 return?

While Susan was on vacation during the current year, someone broke into her home and stole the following items: ? A computer used 60% in connection with Susan as an employee and 40% for her personal use. The cost of the computer was $8,000. Depreciation of $3,000 had been taken on the computer and it had a fair market value of $4,000 at the time of the theft. ? A painting that Susan purchased as an investment for $10,000 had a fair market value of $17,000. ? Silverware purchased for $3,000 had a fair market value of $5,000. ? Cash of $30,000. Susan's adjusted gross income, before considering any of these items, is $60,000. Determine the total amount of her itemized deductions resulting from the theft.

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