Chapter 7 - Deductions and Losses: Certain Business Expenses and Losses HW Quiz Questions

Peggy is in the business of purchasing accounts receivable from businesses at a discount and then collecting them. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,00. How much loss can Peggy deduct and in which year?

$0 - Peggy’s basis in the debt is $25,000. Therefore, her loss for the current year is $0 ($25,000 - $25,000).

Jed is an electrician. He 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 Court for the unpaid amount and was awarded a $2,000 judgement. Jed was able to collect the judgement but not the reminder of the bill from Alison. What amount of loss may Jed deduct in the current year?

$3,000 - Jed is an accrual basis taxpayer and therefore has a basis in the $3,000 not collected.

On June 2, 2023, Juan's TV Sales sold Mark a large HD TV on account for $12,000. Juan's TV Sales uses the accrual method. In 2024, when the balance on the account was $8,000, Mark filed for bankruptcy. Juan was notified that he could not expect to receive any of the amount owed to him. In 2025, final settlement was made and Juan received $1,000. How much bad debt loss can Juan deduct in 2025?

$0 - This debt is a business debt. As a result, partial worthlessness can be recognized in 2024. The loss in 2024 would be $8,000. In 2025, the account has been written down to zero; so the collection of $1,000 would produce $1,000 ($1,000 – $0) of income rather than a loss.

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?

$12,000 - Nonbusiness bad debts are treated as short-term capital losses. Hence, the $20,000 bad debt can offset the $18,000 of long-term capital gains, and she can use the remaining $2,000 capital loss to offset any ordinary income. Therefore, the tax benefit was $20,000 and $12,000 would be recognized as income.

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.

$7,000 gain - The amount collected is $7,000 ($97,000 – $90,000) more than Lucy's basis in the receivable.

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?

Report $13,000 of income for the current year. - Income should be reported based on the tax benefit rule. Because all $18,000 of the nonbusiness bad debt created a tax benefit ($16,000 via offsetting the net long-term capital gains and the balance via a capital loss deduction), Gina should report $13,000 of income this year under the tax benefit rule.

Five years ago, Tom loaned his son Liam $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 10 years. Liam always made the interest payments until last year. During the current year, Liam 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:

$3,000 deduction - This is a bona fide loan to his son; therefore, Tom is entitled to a bad debt of $21,800 ($20,000 + $1,800; a deduction is allowed for the $1,800 of accrued interest receivable because Tom is an accrual basis taxpayer). The deduction for the current year is limited to $3,000, as the bad debt is classified as a short-term capital loss.

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?

$15,500 - This is a business bad debt for Hank's Auto; therefore, the loss is $15,500.

On September 3, 2018, Aaron, a single individual, purchased § 1244 stock in Red Corporation from his friend Peter for $60,000. On December 31, 2018, the stock was worth $85,000. On August 15, 2024, Aaron was notified that the stock was worthless. How should Aaron report this item on his 2024 tax return?

$60,000 capital loss - The loss of $60,000 is classified as a $60,000 capital loss. Although the stock was § 1244 stock in Peter's hands, the stock loses this status when Peter sells the stock to Aaron (the stock must be issued by the corporation to a shareholder).

On February 20, 2023, Alicia purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2024, the stock became worthless. During 2024, Alicia 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 Alicia treat these items on her 2024 tax return?

$8,000 ordinary loss and $3,000 short-term capital loss. -

Samuel files a return as a single taxpayer. In 2024, 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 Samuel's AGI for 2024.

 $0 - $15,000 ($65,000 – $50,000) is long-term capital loss. Of this amount, no loss can be used because there is no ordinary income. $15,000 will be carried forward.

Ahmed, 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 Ahmed's AGI for the current year.

$27,000

On July 20, 2019, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000 from a friend. On November 10, 2023, Matt purchased an additional 1,000 shares of Orange Corporation stock from another friend for $150,000. On September 15, 2024, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2024 return?

$54,000 STCL - Hence, Matt has a $54,000 STCL ($120,000 – $66,000).

Which of the following events would produce a deductible loss in 2024?

a. Damages to personal residence from hurricane in a Federal disaster area.

b. A misplaced diamond ring.

c. Termite infestation of a personal residence over a several year period.

d. Erosion of personal use land due to rain or wind.

a. Damages to personal residence from hurricane in a Federal disaster area. - Only "Damages to personal residence from hurricane in a Federal disaster area" occurred in a Federally declared disaster area.

In 2024, Wally had the following insured personal casualty losses (arising from one casualty in a Federally declared disaster area). Wally also had $42,000 AGI for the year before considering the casualty.

		Fair Market Value
Asset	Adjusted Basis	Before	After	Insurance Recovery
A	$9,200	$8,000	$1,000	$2,000
B	3,000	4,000	-0-	4,000
C	3,700	1,700	-0-	900

 

Wally's casualty loss deduction is:

$500

Jim had a car accident in 2024 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. He 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.

$19,000 - The car is used for business use; hence, the amount of the loss is $40,000 (adjusted basis) reduced by the insurance recovery ($21,000). The $19,000 loss is not subject to the $100 floor per event and the 10%-of-AGI limitation. So the loss is $19,000.

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2024. 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 he feared 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?

$0 - This personal casualty loss did not occur in a Federally declared disaster area; it is not allowed as a deduction.

Kalani had adjusted gross income of $60,000 in 2024. During the year, her personal use summer home was damaged by a fire. Pertinent data with respect to the home follows:

Cost basis	$260,000
Value before the fire	400,000
Value after the fire	100,000
Insurance recovery	270,000

 

Kalani had an accident with her personal use car. As a result of the accident, she was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:

Cost basis	$80,000
Value before the accident	56,000
Value after the accident	20,000
Insurance recovery	18,000

 

What is Kalani's itemized casualty loss deduction?

$0 - Gain on home ($270,000 – $260,000) = $10,000.

Kalani has no itemized casualty loss deduction because casualty gains exceed casualty losses. There is no casualty loss on the car because the accident was the result of willful negligence.

In 2024, Grant's personal residence was completely destroyed by fire. He was insured for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income before considering the casualty item of $30,000. Pertinent data with respect to the residence follows:

Cost basis	$280,000
Value before casualty	250,000
Value after casualty	–0–

 

What is Grant's allowable casualty loss deduction?

$0 - The proceeds received are $250,000. Therefore, Grant has no casualty gain or loss.

In 2024, Mary reported the following items:

Salary	$40,000
Personal use casualty gain	10,000
Personal use casualty loss (after $100 floor)	17,000
Other itemized deductions	4,000

 

Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2024.

$18,100

In 2024, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:

Loss from damage to rental property	($6,000)
Loss from theft of bonds	(3,000)
Personal casualty gain	4,000
Personal casualty loss (after $100 floor)	(9,000)

 

The personal casualties occurred in a Federally declared disaster area. Determine the amount of Morley's itemized deduction from the losses.

$5,600 - The bonds are property held for the production of income but not attributable to rents or royalties. Therefore, the loss is an itemized deduction (but not a miscellaneous itemized deduction, which would be nondeductible in 2024).

Alicia was involved in an automobile accident in 2024. Her car was used 60% for business and 40% for personal use. The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If her AGI is $50,000 (before considering the loss), determine her AGI and itemized deduction for the casualty loss.

a. $34,000; $4,500.

$34,000; $-0-.

Alma is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy. She has adjusted gross income of $40,000 for the year (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year.

$18,750 -

Amount of loss (adjusted basis for business property that is completely destroyed)	$90,000
Less: Insurance proceeds received ($75,000 × 95%)	(71,250)
Business loss	$18,750

 

A business casualty loss is classified as an ordinary loss.

In the current year, Juan's home was burglarized. He had the following items stolen:

∙	Securities worth $25,000. Juan purchased the securities four years ago for $20,000.
∙	New tools that Juan had purchased two weeks earlier for $8,000. He uses the tools in making repairs at an apartment house that he owns and manages.
∙	An antique worth $15,000. Juan inherited the antique (a family keepsake) when the property was worth $11,000.

 

Juan's homeowner's policy had a $50,000 deductible clause for thefts. If his salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft.

$20,000 -

Salary	$50,000
Less: Loss on theft of tools	(8,000)
AGI	$42,000
Personal use property theft loss (not deductible; not a result of a Federally declared disaster)	$-0-
Loss on securities	20,000
Total itemized deductions	$20,000

Regarding research and experimental expenditures, which of the following are not qualified expenditures?

a. Costs of developing a formula.

b. Costs of ordinary testing of materials.

c. Depreciation on a building used for research.

d. Costs to develop a plant process.

b. Costs of ordinary testing of materials.

In April 2024, Blue Corporation incurred the following expenses in connection with the development of a new product:

Salaries	$104,000
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 in 2025. Determine the amount of the deduction for research and experimental expenditures for 2024.

$15,600 - The qualified research expenditures are $156,000 ($104,000 + $18,000 + $25,000 + $9,000). The monthly amortization is $2,600 ($156,000 ÷ 60 months). Amortization begins at the midpoint of the year the expenses are paid or incurred. So Blue is allowed a deduction of $15,600 ($2,600 x 6) in 2024.

In 2024, Green Corporation incurred the following expenditures in the development of a new plant process:

Salaries	$250,000
Materials	90,000
Utilities	20,000
Quality control testing costs	40,000
Management study costs	5,000
Depreciation of equipment	18,000

 

During 2025, benefits from the project began being realized in May. Determine the amount of the deduction for 2025.

$75,600 -

Salaries	$250,000
Materials	90,000
Utilities	20,000
Depreciation	18,000
Research and experimental costs	$378,000

 

Current deduction is $75,600 ($378,000 ÷ 5 years). Neither the quality control testing costs nor the management study costs are research and experimental expenditures. It does not matter when Green first realizes benefits from the research.

In the computation of a net operating loss, which of the following items is not added to the negative taxable income?

a. Personal theft loss.

b. Deductible alimony payments.

c. Losses incurred in a transaction entered into for profit.

d. Losses from theft of securities.

b. Deductible alimony payments.

In 2024, Theo, a single taxpayer, operates a sole proprietorship in which he materially participates. His proprietorship generates gross income of $320,000 and deductions of $630,000, resulting in a loss of $310,000. 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?

$5,000. - Theo's excess business loss is $21,000 computed as follows:

Aggregate business deductions	$630,000
Less: Aggregate business gross income and gains	(320,000)
Less: Threshold amount	(305,000)
Excess business loss	$  5,000

 

So, of Theo's $310,000 proprietorship loss, $305,000 can be used to offset nonbusiness income. The $5,000 excess business loss is treated as part of Theo's net operating loss carryforward in subsequent years.

In 2024, Alaina is married and files a joint return. She operates a sole proprietorship in which she materially participates. Her proprietorship generates gross income of $225,000 and deductions of $525,000, resulting in a loss of $300,000. What is Alaina's excess business loss for the year?

$-0-. - Alaina does not have an excess business loss due to the threshold amount that applies to married taxpayers.

Aggregate business deductions	$525,000
Less: Aggregate business gross income and gains	(225,000)
Less: Threshold amount	(610,000)
Excess business loss	$   -0-

 

As a result, Alaina's $300,000 sole proprietorship loss is fully deductible and can be used to offset nonbusiness income (e.g., her spouse's wages or their interest and dividend income).