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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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The purpose of the excess business loss rules is to limit the amount of nonbusiness income (e.g., salaries, interest, dividends) that can be sheltered from tax as a result of business losses.

A) True
B) False

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Question 2

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In 2019, Cindy 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 Cindy's excess business loss for the year?

A) $-0-.
B) $30,000.
C) $250,000.
D) $280,000.
E) None of these.

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

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Question 3

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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.

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

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 2019, Theo, a single taxpayer, operates a sole proprietorship in which he materially participates.His proprietorship generates gross income of $320,000 and deductions of $600,000, resulting is a loss of $280,000.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?

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.

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.

The amount of a business loss cannot exceed the amount of the taxpayer's NOL for the taxable year.

Maria, who is single, reports the following items for 2019: $\begin{array}{llcc} \text {Salary } &\$80,000\\ \text { Loss on sale of \S 1244 small business stock acquired three years ago } &(60,000)\\\end{array}$ $\begin{array}{llcc} \text {Stock acquired two years ago became worthless during the year } &(5,000)\\ \text {Long-term capital gain } &25,000\\ \text { Nonbusiness bad debt } &(15,000)\\ \text { Federal disaster area casualty loss on property held six months } &(6,000)\\ \text { Federal disaster area casualty gain on property held four years } &4,000\\ \\ \text { Determine Maria's adjusted gross income for 2019. } &\\\end{array}$

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.

A business theft loss is taken in the year of the theft.

Discuss the tax treatment of nonreimbursed losses of an employee in connection with a trade or business.

Jim had a car accident in 2019 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.

A taxpayer can carry an NOL forward indefinitely.

Taxpayer's home was destroyed by a storm in the current year in a Federally declared disaster area.If the taxpayer elects to treat the loss as having occurred in the prior year, it will be subject to the 10%-of-AGI reduction based on the AGI of the current year.

In 2019, Mary had the following items: $\begin{array} { l r } \text { Salary } & \$ 30,000 \\\text { Personal use casualty gain } & 10,000 \\\text { Personal use casualty loss (after } \$ 100 \text { floor) } & 17,000 \\\text { Other itemized deductions } & 4,000\end{array}$ Assuming that Mary files as head of household (has one dependent child) , determine her taxable income for 2019.

The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.

Personal casualty gains are allowed to offset personal casualty losses.Currently, if an excess casualty loss results, it is not deductible (unless attributable to a Federally declared disaster).