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

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Question 41

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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 these.

F) C) and D)
G) A) and E)

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Question 42

Multiple Choice

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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?

A) $0 income
B) $8,000 income
C) $11,000 income
D) $12,000 income
E) None of these.

F) All of the above
G) A) and D)

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Question 43

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If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year.

James is in the business of debt collection.He purchased a $20,000 account receivable from Green Corporation for $15,000.During the year, he collected $17,000 in final settlement of the account.James can take a $2,000 bad debt deduction in the current year.

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

Roger, an individual, owns a proprietorship Green Options.For the year 2019, Roger reports the following items: ? Business income-$200,000. ? Business expense-$150,000. ? Loss on a completely destroyed business machine.The machine had an adjusted basis of $25,000 and a fair market value of $20,000. ? Loss on a business truck.The truck had an adjusted basis of $8,000.The repairs to fix the truck cost $10,000.Determine Roger's adjusted gross income for 2019.

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

In 2019, Tan Corporation incurred the following expenditures in connection with the development of a new product: $\begin{array} { l r } \text { Salaries } & \$ 60,000 \\\text { Supplies } & 20,000 \\\text { Depreciation on research equipment } & 10,000 \\\text { Testing for quality control } & 5,000 \\\text { Advertising } & 8,000 \\\text { Overhead allocated to research } & 2,000\end{array}$ Tan began selling the product in November 2019.If Tan elects to amortize research and experimental expenditures, determine its deduction for 2019.

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

Bruce, 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 Bruce's AGI for the current year.

Which of the following events would produce a deductible loss in 2019?

John had adjusted gross income of $60,000 in 2019.During the year, his personal use summer home was damaged by a fire.Pertinent data with respect to the home follows: $\begin{array} { l r } \text { Cost basis } & \$ 260,000 \\ \text { Value before the fire } & 400,000 \\ \text { Value after the fire } & 100,000 \\ \text { Insurance recovery } & 270,000 \end{array}$ John had an accident with his personal use car. As a result of the accident, He was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows: $\begin{array} { l r } \text { Cost basis } & \$ 80,000 \\ \text { Value before the accident } & 56,000 \\ \text { Value after the accident } & 20,000 \\ \text { Insurance recovery } & 18,000 \end{array}$ What is John's itemized casualty loss deduction?

A bond held by an investor that is uncollectible will be treated as a worthless security and, hence, produce a capital loss.

When a net operating loss is carried forward, it can affect the medical expense deduction of that year.

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.

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2019.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?

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

Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback year.

Khalid, who is single, reports the following items for 2019: $\begin{array} { l r } \text { Salary } & \$ 40,000 \\\text { Interest income on U.S. Treasury bonds } & 8,000 \\\text { Loss on theft of securities } & ( 60,000 ) \\\text { Interest income on New York state bonds } & 12,000\end{array}$ What is Khalid's NOL for 2019?

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