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

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Question 51

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Other casualty means casualties similar to those associated with fires, storms, or shipwrecks.

A) True
B) False

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Question 52

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Alicia was involved in an automobile accident in 2019.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; $-0-.
B) $50,000; $-0-.
C) $34,000; $4,500.
D) $26,000; $5,700.
E) None of these.

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

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Question 53

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

In 2017, Amos had AGI of $50,000.In December 2017, Amos also had a diamond ring stolen that cost $20,000 and was worth $17,000 at the time of the theft.He itemized deductions on his 2017 tax return.In 2019, after a variety of investigations, 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.

Juanita, single and age 43, reports the following items for 2019: $\begin{array} { l r } \text { Salary } & \$ 60,000 \\\text { Interest income } & 6,000 \\\text { Casualty loss on business property } & ( 15,000 ) \\\text { Casualty loss on rental property } & ( 5,000 ) \\\text { Loss on theft of securities } & ( 8,000 ) \\\text { Personal casualty gains } & 9,000 \\\text { Personal casualty loss (after } \$ 100 \text { floor) } & ( 13,000 ) \\\text { Other itemized deductions } & ( 9,000 )\end{array}$ Compute Juanita's taxable income for 2019.

Jack, age 30 and married with no dependents, is a self-employed individual.For 2019, his self-employed business sustained a net loss from operations of $10,000 from operations .The following additional information was obtained from his personal records for the year: $\begin{array} { l r } \text { Nonbusiness long-term capital gain } & \$ 2,000 \\\text { Interest income } & 6,000 \\\text { Itemized deductions-consisting of taxes and interest } & ( 26,000 ) \end{array}$ Based on this information, what is Jack's net operating loss for 2019 if he and his spouse file a joint return?

An NOL carryforward is used in determining the current-year's charitable contribution deduction.

Elizabeth reports the following items for the current year: $\begin{array} { l r } \text { Nonbusiness capital gains } & \$ 5,000 \\\text { Nonbusiness capital losses } & ( 3,000 ) \\\text { Interest income } & 3,000 \\\text { Itemized deductions (including a } \$ 20,000 \text { casualty loss in a Federal disaster } & ( 27,000 ) \\\text { area) } &\end{array}$ In calculating Elizabeth's net operating loss and with respect to these amounts only, what amount must be added back to taxable income (loss) ?

A loss from a worthless security is always treated as a short-term capital loss.

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.

Jason, married and filing jointly, reports the following income for 2019: $\begin{array} { l r } \text { Salary } & \$ 70,000 \\\text { Loss on the sale of } \S 1244 \text { stock held for five years } & ( 110,000 ) \\\text { Dividends } & 25,000 \\\text { Interest income } & 10,000 \\\text { Itemized deductions (no casualty losses) } & ( 20,000 )\end{array}$ Jason has four dependent children.Calculate his net operating loss for 2019.

Janice, single, reports the following items for 2019: $\begin{array}{llcc} \text { Salary } & \$30,000 \\\end{array}$ $\begin{array} { l r } \text { Dividend income } & 8,000 \\\text { Loss on § } 1244 \text { small business stock held for three years } & ( 45,000 ) \\\text { Total itemized deductions } & ( 5,000 ) \end{array}$ Determine Janice's net operating loss for 2019.

In 2019, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: $\begin{array} { l r } \text { Loss from damage to rental property } & ( \$ 6,000 ) \\\text { Loss from theft of bonds } & ( 3,000 ) \\\text { Personal casualty gain } & 4,000 \\\text { Personal casualty loss (after } \$ 100 \text { floor) } & ( 9,000 ) \end{array}$ The personal casualties occurred in a Federally declared disaster area.Determine the amount of Morley's itemized deduction from the losses.

In 2018, Robin Corporation incurred the following expenditures in connection with the development of a new product: $\begin{array}{l}\begin{array} { l r } \text { Salaries } & \$ 100,000 \\\text { Supplies } & 40,000 \\\text { Market survey } & 10,000 \\\text { Depreciation } & 25,000\end{array}\\\\\text { In 2019, Robin incurred the following additional expenditures in connection with the development of the product: }\\\\\begin{array} { l r } \text { Salaries } & \$ 125,000 \\\text { Supplies } & 50,000 \\\text { Depreciation } & 30,000 \\\text { Advertising } & 10,000\end{array}\end{array}$ In October 2019, Robin began receiving benefits from the project.If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction.

Stella, age 38, is single with no dependents.The following information was obtained from her personal records for the 2019 year. $\begin{array} { l r } \text { Salary } & \$ 30,000 \\\text { Interest income } & 7,000 \\\text { Alimony received } & 12,000 \\\text { Individual retirement account contribution } & 2,000 \\\text { Home mortgage interest expense } & 4,000 \\\text { Property taxes } & 2,000 \\\text { Personal casualty loss in a Federal disaster area } & 38,000 \\\quad \text { (after the \$100 floor) } & \\\text { Stolen investment property }&16,000\end{array}$ Based on this information, what is Stella's net operating loss for 2019?

In 2019, 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. $\begin{array}{cccc}&& \underline{\text { FairMarketValue} }\\\underline{\text { Asset }} & \underline{\text { AdjustedBasis }} & \underline{\text { Before }} &\underline{ \text { After }} &\underline{\text { Insurance Recovery }}\\A&\$ 9,200 & \$ 8,000 & \$ 1,000 & \$ 2,000 \\B&3,000 & 4,000 & -0- & 4,000 \\C&3,700 & 1,700 & -0- & 900\end{array}$ Wally's casualty loss deduction is:

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

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.

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

A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.