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

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Question 41

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Discuss the treatment of alimony paid and deductible individual retirement account contributions in computing an individual's net operating loss.

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Question 42

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

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Question 43

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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: $\begin{array}{lr}\text { Cost basis } & \$ 260,000 \\\text { Value before the fire } & 400,000 \\\text { Value after the fire } & 100,000 \\\text { Insurance recovery } & 270,000\end{array}$ 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: $\begin{array}{lr}\text { Cost basis } & \$ 80,000 \\\text { Value before the accident } & 56,000 \\\text { Value after the accident } & 20,000 \\\text { Insurance recovery } & 18,000\end{array}$ What is John's itemized casualty loss deduction?

Ralph is single and reports the following items for 2019: $\begin{array}{lc}\text { Nonbusiness capital gains } & 9,000 \\\text { Nonbusiness capital losses } & (3,000) \text { Interest } \\\text { income } & 6,000 \\\text { Itemized deductions (none of the amount resulted from a casualty loss) } & (10,000) \end{array}$ In calculating Ralph's net operating loss and with respect to these amounts only, what amount must be added back to taxable income (loss) ?

Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income.

In determining whether a debt is a business or nonbusiness bad debt, the debtor's use of the borrowed funds is important.

Susan reports the following items for 2019: ? Loss on rental property caused by termites-$110,000. Insurance covered 80% of the loss. ? Loss on personal use automobile-$10,000. The insurance policy does not cover the first $3,000 of loss. Susan decided not to file a claim for the loss. ? Loss on a painting stolen from Susan's house. She purchased the painting three years ago as an investment for which she paid $40,000. It was worth $35,000 at the time of the theft. The painting was insured for the fair market value. ? Salary-$40,000. Determine Susan's AGI and total amount of itemized deductions for 2019.

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

In 2018, Robin Corporation incurred the following expenditures in connection with the development of a new product: $\begin{array} { l r } \text { Salaries } & \$ 100,000 \\\text { Supplies } & 40,000 \\\text { Market survey } & 10,000 \\\text { Depreciation } & 25,000\end{array}$ In 2019, Robin incurred the following additional expenditures in connection with the development of the product: $\begin{array} { l r } \text { Salaries } & \$ 125,000 \\\text { Supplies } & 50,000 \\\text { Depreciation } & 30,000 \\\text { Advertising } & 10,000\end{array}$ 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.

John files a return as a single taxpayer. In 2019, 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 John's AGI for 2019.

Gary, who is an employee of Red Corporation, reports the following items for 2019: $\begin{array}{lr}\text { Salary } & \$ 80,000 \\\text { Federal disaster area personal casualty gain } & 7,000 \\\text { Federal disaster area personal casualty loss from one event (before } & (15,000) \\\text { the } \$ 100 \text { floor) } &\\\text { Loss on rental property } & (6,000) \\\text { Theft of bonds } & (18,000) \\\text { Unreimbursed loss from theft of a computer used } 100 \% \text { for business } & (4,000)\end{array}$ Determine Gary's AGI and total amount of itemized deductions for 2019.

A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency.

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?

An individual taxpayer who does not itemize deductions uses the standard deduction to compute the excess of nonbusiness deductions over the sum of nonbusiness income and net nonbusiness capital gains for purposes of computing net operating loss.

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.

If a noncorporate taxpayer has an excess business loss for the year, it is not allowed.

Discuss the effect of alimony in computing an NOL.

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

Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year?