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

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Question 1

True/False

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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.

A) True
B) False

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Question 2

Multiple Choice

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Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in 2014. Ivory's domestic production activities deduction is:

A) $36,000.
B) $42,000.
C) $54,000.
D) $63,000.
E) None of the above.

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

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C

Question 3

Essay

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Red Company is a proprietorship owned by Sally, a single individual. Red manufactures and sells widgets. During 2014, an examination of Red's records shows the following items: Determine Sally's domestic production activities deduction for 2014.

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

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

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.

Jose, single, had the following items for 2014: Salary $44,000 § 1244 loss on stock acquired 3 years ago (70,000) § 1244 gain on stock acquired 10 months ago 26,000 Worthless security purchased in June of last year (4,000) Nonbusiness bad debt (7,000) Interest income 8,000 Compute Jose's adjusted gross income for 2014.

An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.

A taxpayer can carry any NOL incurred forward up to 20 years.

What are the three methods of handling research and experimental expenditures incurred in a trade or business? Under what circumstances would you choose each?

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

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

In 2014, Tan Corporation incurred the following expenditures in connection with the development of a new product: $\begin{array}{lr}\text { Salaries } & \$ 60,000 \\\text { Supplies } & 20,000 \\\text { Depreciation on research equipment } & 10,000 \\\text { Testing for quality control } & 5,000 \\\text { Advertising } & 8,000 \\\text { Overhead allocated to research } & 2,000\end{array}$ Tan began selling the product in November 2014. If Tan elects to amortize research and experimental expenditures, determine Tan's deduction for 2014.

A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.

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.

Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.

A personal casualty loss deduction may be allowed for losses resulting from termites.

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

John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows: $\begin{array}{ll}\text { Cost basis } & \$ 260,000 \\\text { Value before the fire } & 400,000 \\\text { Value after the fire } & 100,000 \\\text { Insurance recovery } & 270,000\end{array}$ John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows: $\begin{array}{lr}\text { Cost basis } & \$ 80,000 \\\text { Value before the accident } & 56,000 \\\text { Value after the accident } & 20,000 \\\text { Insurance recovery } & 18,000\end{array}$ What is John's itemized casualty loss deduction?