South western federal taxation 2011 comprehensive 34th edition hoffman test bank

South Western Federal Taxation 2011 Comprehensive 34th Edition Hoffman Test Bank Visit to download the full and correct content document: https://testbankdeal.com/dow nload/south-western-federal-taxation-2011-comprehensive-34th-edition-hoffman-testbank/

CHAPTER 7--DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES Student: ___________________________________________________________________________ 1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $17,000 in final settlement of the account. James can take a $3,000 bad debt deduction in the current year.

True False

2. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year.

True False

3. Last year, taxpayer had a $10,000 business loan that was written off. Last year, taxpayer also had an NOL which taxpayer carried back two years and used in its entirety. If taxpayer collects the entire $10,000 during the current year, $10,000 needs to be included in gross income.

True False

4. Accrual basis taxpayers can use the reserve method for computing deductions for bad debts.

True False

5. If an account receivable written off during the current year is subsequently collected during the current year, the write-off entry is reversed.

True False

6. Bankruptcy is generally an indication that a debt is worthless.

True False

7. A nonbusiness bad debt is a debt unrelated to the taxpayer’s trade or business either when it was created or when it became worthless.

True False

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

True False

9. A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.

True False

10. A business bad debt can offset an unlimited amount of ordinary income.

True False

11. The amount of complete worthlessness on a nonbusiness bad debt is deducted at final settlement.

True False

12. A bona fide debt arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed sum of money.

True False

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

True False

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

True False

15. A loss is allowed for a security that declines in value.

True False

16. Several years ago, John purchased 2,000 shares of § 1244 stock from Red Corporation for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, Mike sold the Red Corporation stock for $3,000. Mike has a $9,000 ($3,000 – $12,000) ordinary loss for the current year.

True False

17. Taxpayers must sell or exchange their § 1244 stock in order to recognize an ordinary loss (does not apply to stock becoming worthless).

True False

18. Al, who is single, has a gain of $20,000 on the sale of §1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock. As a result, Al has a $10,000 net capital loss and a $50,000 ordinary loss.

True False

19. An individual may deduct a loss on rental property only if it meets the definition of a casualty loss.

True False

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

True False

21. A father cannot claim a casualty on his daughter’s personal use property.

True False

22. A casualty loss deduction is not allowed for losses resulting from a decline in value rather than an actual loss of property.

True False

23. If the amount of the insurance recovery for a theft of business property is greater than the asset’s fair market value but less than it’s adjusted basis, a loss is recognized.

True False

24. A theft loss is taken in the year the theft occurred.

True False

25. If a taxpayer receives reimbursement for a casualty loss sustained and deducted in a previous year, the total reimbursement must be included in gross income on the return for the year in which the reimbursement is received.

True False

26. If rental property is completely destroyed, the amount of the loss is the adjusted basis of the property at the time of the destruction reduced by $100 ($500 in 2009) and 10% of AGI. True False

27. The cost of repairs to damaged property may be acceptable as a measure of the loss in value of the property.

True False

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

True False

29. The amount of loss for partial destruction of business property is the lesser of the adjusted basis or the decline in fair market value.

True False

30. If personal casualty losses (after deducting the $100 floor) exceed personal casualty gains in 2010, the itemized deduction is always equal to the losses, to the extent they exceed 10% of adjusted gross income.

True False

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

True False

32. Losses on rental property are classified as deductions for AGI. True False

33. When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10% of adjusted gross income for the first year.

True False

34. A theft loss of investment property is a miscellaneous itemized deduction subject to the 2%-of-AGI floor.

True False

35. Research and experimental expenditures do not include expenditures for ordinary testing of materials for quality control.

True False

36. Expenses in connection with the acquisition of land are not research and experimental expenditures.

True False

37. If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project.

True False

38. For tax years beginning in 2010, the domestic production activities deduction (DPAD) for a sole proprietor is calculated by multiplying 9% times the lesser of (1) qualified production activities income (QPAI) or (2) taxable income or alternative minimum taxable income.

True False

39. If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction in 2010 because of the taxable income limitation, the product of the amount not allowed multiplied by 9% can be carried over for 5 years.

True False

40. The domestic production activities deduction (DPAD) for 2010 cannot exceed 50% of all W-2 wages paid to employees engaged in qualified domestic production activities by the taxpayer during the tax year.

True False

41. A theft or other casualty of personal use property can create an NOL for an individual.

True False

42. A taxpayer must carry any NOL incurred back two years.

True False

43. A farming NOL may be carried back 5 years.

True False

44. The amount of a farming loss cannot exceed the amount of the taxpayer’s NOL for the taxable year.

True False

45. 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 $18,000. How much loss can Peggy deduct and in which year?

A. $5,000 for the current year.

B. $5,000 for the prior year and $7,000 for the current year.

C. $7,000 for the current year.

D. $12,000 for the current year.

E. None of the above.

46. Jed is an electrician. Jed and his wife are cash 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 never able to collect the judgement nor the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year?

A. $0.

B. $2,000.

C. $3,000.

D. $5,000.

E. None of the above.

47. On June 2, 2009, Fred’s TV Sales sold Mark a large HD TV, on account, for $12,000. Fred’s TV Sales uses the accrual method. In 2010, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could expect to receive 60 cents on the dollar of the amount owed to him. In 2011, final settlement was made and Fred received $5,000. How much bad debt loss can Fred deduct and in which years?

A. 2009—$12,000.

B. 2009—$0; 2010—$8,000.

C. 2009—$0; 2010—$3,200; 2011—$0.

D. 2010—$4,800.

E. None of the above.

48. Red Corporation incurred a $12,000 bad debt last year. Red Corporation also had an $8,000 long-term capital gain last year. Red’s taxable income for last year was $28,000. During the current year, Red Corporation, unexpectedly, collected $5,000 on the debt. How should Red Corporation account for the $5,000 collection?

A. $0 income.

B. $3,000 income.

C. $4,000 income.

D. $5,000 income.

E. None of the above.

49. Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $87,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected.

A. $0.

B. $2,000 gain.

C. $3,000 loss.

D. $13,000 loss.

E. None of the above.

50. 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 $60,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends. 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 $8,000 of income for the current year.

D. Report $12,000 of income for the current year.

E. Report $13,000 of income for the current year.

51. Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is a cash basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is: A. No deduction.

B. $3,000 deduction.

C. $20,000 deduction.

D. $21,800 deduction.

E. None of the above.

52. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank’s Auto. As partial payment for the car, the dealer accepted the note from Sharon’s sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharon’s sister died.

Hank’s Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is the amount of loss, with respect to the note, that Hank’s Auto may claim on the current year tax return?

A. $0.

B. $3,000.

C. $15,500.

D. $18,000.

E. None of the above.

53. On September 3, 2009, Able purchased § 1244 stock in Red Corporation for $6,000. On December 31, 2009, the stock was worth $8,500. On August 15, 2010, Able was notified that the stock was worthless. How should Able report this item on his 2009 and 2010 tax returns?

A. 2009—$0; 2010—$6,000 ordinary loss.

B. 2009—$0; 2010—$6,000 long-term capital loss.

C. 2009—$2,500 short-term capital loss; 2010—$8,500 short-term capital loss.

D. 2009—$2,500 short-term capital gain; 2010—$3,800 ordinary loss.

E. None of the above.

54. On February 20, 2009, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2010, the stock became worthless. During 2010, Bill also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How should Bill treat these items on his 2010 tax return?

A. $4,000 long-term capital loss and $9,000 short-term capital loss.

B. $4,000 long-term capital loss and $3,000 short-term capital loss.

C. $8,000 ordinary loss and $3,000 short-term capital loss.

D. $8,000 ordinary loss and $5,000 short-term capital loss.

E. $8,000 long-term capital loss and $6,000 short-term capital loss.

55. John files a return as a single taxpayer. In 2010, 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 $8,000.

Determine John’s AGI for 2010.

A. ($5,000).

B. $0.

C. $45,000.

D. $48,000.

E. None of the above.

56. Bruce, who is single, had the following items for the current year:

· · · ·

Salary of $90,000.

Gain of $30,000 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 $7,000. 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.

A. $37,000.

B. $38,000.

C. $42,000.

D. $47,000.

E. None of the above.

57. On July 20, 2008, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000. On November 10, 2009, Matt purchased an additional 1,000 shares of Orange Corporation stock for $150,000. On September 15, 2010, Matt sold the 4,000 shares of stock for $80,000. How should Matt treat the sale of the stock on his 2010 return?

A. $94,000 ordinary loss.

B. $100,000 ordinary loss; $6,000 net capital gain.

C. $100,000 ordinary loss; $30,000 STCL. D. $130,000 ordinary loss; $36,000 LTCG. E. None of the above.

58. Which of the following events would produce a deductible loss?

A. Erosion of personal use land due to rain or wind.

B. Termite infestation of a personal residence over a several year period.

C. Damages to personal automobile resulting from a taxpayer’s willful negligence.

D. A misplaced diamond ring.

E. None of the above.

59. In 2010, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $48,000 AGI for the year.

Asset A B C

Adjusted Basis $9,200 3,000 3,700

Fair Market Value Before $8,000 4,000 1,900

Insurance After $1,000 –0– –0–

Recovery $2,000 500 800

Wally’s casualty loss deduction is:

A. $4,100.

B. $4,500.

C. $8,600.

D. $9,500.

E. None of the above.

60. Jim had a car accident in 2010 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 personal use. Jim received an insurance recovery of 80% of the value of the car at the time of the accident. If Jim’s AGI for the year is $50,000, determine his deductible loss on the car.

A. $900.

B. $6,000.

C. $10,500.

D. $30,000.

E. None of the above.

61. Norm’s car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2010.

The car’s adjusted basis at the time of the accident was $13,000. Its fair market value was $11,500. The car was covered by a $2,000 deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear 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. $0.

B. $100.

C. $500.

D. $9,500.

E. None of the above.

62. In 2010, Grant’s personal residence was damaged by fire. Grant was insured for 90% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows:

Cost basis Value before casualty Value after casualty

What is Grant’s allowable casualty loss deduction?

A. $0.

B. $6,500.

C. $6,900.

D. $10,000.

E. $80,000.

$170,000 250,000 150,000

63. 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:

Cost basis Value before the fire Value after the fire Insurance recovery

$250,000 400,000 100,000 270,000

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: Cost basis Value before the accident Value after the accident Insurance recovery

$80,000 6,000 20,000 –0–

What is John’s deductible casualty loss?

A. $0.

B. $15,800.

C. $15,900.

D. $35,900.

E. None of the above.

64. In 2010, Mary had the following items:

Salary Personal use casualty gain Personal use casualty loss (after $100 floor) Other itemized deductions

$30,000 10,000 17,000 4,000

Assuming that Mary files as head of household (has one dependent child), determine her taxable income for the current year.

A. $14,300.

B. $14,700.

C. $19,000.

D. $24,300.

E. None of the above.

65. In 2010, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:

Loss from damage to rental property Loss from theft of bonds Personal casualty gain Personal casualty loss (after $100 floor)

($6,000) (3,000) 4,000 (9,000)

Determine the amount of Morley’s itemized deduction from the losses.

A. $0.

B. $2,900.

C. $5,120.

D. $5,600.

E. None of the above.

66. In 2010, Theo had a salary of $30,000 and experienced the following losses:

Loss from damage to rental property Loss from theft of securities Personal casualty gain Personal casualty loss (after $100 floor)

($10,000) (5,000) 4,000 (3,000)

Determine the amount of Theo’s itemized deduction from these losses.

A. $0.

B. $2,800.

C. $2,900.

D. $4,580.

E. None of the above.

67. Alicia was involved in an automobile accident in 2010. Her car was used 50% for business and 50% 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 Alicia’s AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss.

A. $2,100.

B. $5,700.

C. $6,100.

D. $16,500.

E. None of the above.

68. Last year, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah’s insurance company told her that her policy did not cover the theft. Sarah’s other itemized deductions last year were $10,000. She had AGI of $30,000 last year. In August of the current year, 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 the current year.

A. None of the $5,000 should be included in gross income.

B. $2,900 should be included in gross income.

C. $5,000 should be included in gross income.

D. Last year’s return should be amended to include the $5,000.

E. None of the above.

69. 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. Alma has adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year.

A. $3,750.

B. $14,650.

C. $14,750.

D. $18,750.

E. None of the above.

70. In 2010, Juan’s home was burglarized. Juan had the following items stolen:

· · ·

Securities worth $15,000. Juan purchased the securities four years ago for $20,000.

New tools which Juan had purchased two weeks earlier for $6,000. Juan uses the tools in making repairs at an apartment house that he owns and manages.

An antique worth $12,000. Juan inherited the antique (a family keepsake) when the property was worth $9,000.

Juan’s homeowner’s policy had a $50,000 deductible clause for thefts. If Juan’s salary for the year is $60,000, determine the amount of his itemized deductions as a result of the theft.

A. $3,100.

B. $6,000.

C. $23,100.

D. $23,500.

E. None of the above.

71. Regarding research and experimental expenditures, which of the following are not qualified expenditures?

A. Costs of improving an existing pilot model.

B. Costs to develop a plant process.

C. Costs of developing a formula.

D. Costs of purchasing a building to be used for research.

E. None of the above.

72. Blue Corporation incurred the following expenses in connection with the development of a new product:

Salaries Utilities Materials Advertising Market survey Depreciation on machine

$100,000 18,000 25,000 5,000 3,000 9,000

Blue expects to begin selling the product next year. If Blue elects to expense research and experimental expenditures, determine the amount of the deduction for research and experimental expenditures for the current year.

A. $0.

B. $118,000.

C. $143,000.

D. $152,000.

E. $160,000.

73. Last year, Green Corporation incurred the following expenditures in the development of a new plant process:

Salaries Materials Utilities Quality control testing costs Management study costs Depreciation of equipment

$200,000 80,000 10,000 30,000 5,000 15,000

During the current year, benefits from the project began being realized in March. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.

A. $50,833.

B. $55,833.

C. $56,667.

D. $61,000.

E. None of the above.

74. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $400,000 in 2010. Ivory’s domestic production activities deduction is: A. $24,000.

B. $36,000.

C. $40,000.

D. $54,000.

E. None of the above.

75. Amber operates her business as a sole proprietorship during 2010. Her domestic production activities deduction (DPAD) before any effect of the wage expense limitation is $70,000. The total W-2 wages that her sole proprietorship pays for the tax year are $110,000. The wages paid to employees not engaged in qualified domestic production activities are $20,000. Amber’s DPAD for 2010 is: A. $0.

B. $45,000.

C. $55,000.

D. $70,000.

E. None of the above.

76. Cream, Inc.’s taxable income for 2010 before any deduction for an NOL carryforward of $30,000 is $70,000. Cream’s qualified production activities income (QPAI) is $60,000. What is the amount of Cream’s domestic production activities deduction (DPAD) for 2010?

A. $1,200.

B. $1,800.

C. $2,400.

D. $3,600.

E. None of the above.

77. If a taxpayer has an NOL in 2010 of $20,000, of which $8,000 is attributable to a theft of personal use property, the taxpayer may: A. Carry all of the NOL of $20,000 back 5 years.

B. Carry all of the NOL of $20,000 back 3 years.

C. Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years.

D. All of the above.

E. None of the above.

78. Tonya had the following items for last year:

Salary Short-term capital gain Nonbusiness bad debt Long-term capital loss

$40,000 12,000 (10,000) (5,000)

For the current year, Tonya had the following items: Salary Collection of last year’s bad debt

Determine Tonya’s adjusted gross income for the current year.

$45,000 10,000

79. Maria, who is single, had the following items for 2010:

Salary Loss on sale of § 1244 small business stock acquired 3 years ago Stock acquired 2 years ago became worthless during the year Long-term capital gain Nonbusiness bad debt Casualty gain on property held 4 years

$80,000 (60,000) (5,000) 17,000 (8,000) 4,000

Determine Maria’s adjusted gross income for 2010.

80. Mike, single, age 31, had the following items for 2010:

Salary Nonbu siness bad debt Casual ties—i ndepen dent events

$42,000 (4,500)

Asset A (personal use property held for two years)—gain Securities (stolen)—loss Divide nds Interes t expens e on person al residen ce

Compute Mike’s taxable income for 2010.

2,000 (5,000) 1,000 10,000

81. Julie, who is single, has the following items for 2010:

· ·

· ·

· Determi ne the amount of Julie’s taxable income for the current year.

Salary – $100,000.

A hurricane completely destroyed Julie’s duplex during the current year. Julie lived in one-half of the duplex and rented out the other half. Julie paid $400,000 for the duplex and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex was worth $420,000 at the time of the destruction. Julie’s insurance policy paid her 90% of the fair market value of the duplex.

Household items destroyed in the hurricane had a basis of $15,000 and a fair market value of $8,500. There was no insurance recovery on the household items.

Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the painting was worth $10,000. Julie purchased the painting as an investment with the intent that she would sell it when its value exceeded $12,000. There was no insurance recovery on the painting.

Home mortgage interest – $10,000.

82. Juanita, single and age 43, had the following items for 2010:

Salary Interest income Casualty loss on long-term business property Casualty loss on rental property Loss on theft of securities Personal casualty gains Personal casualty loss (after $100 floor) Other itemized deductions

Compute Juanita’s taxable income for 2010.

$60,000 6,000 (15,000) (5,000) (8,000) 6,000 (13,000) (9,000)

83. 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’s rental property and 40% for her personal use. The cost of the computer was $8,000. Depreciation of $1,000 had been taken on the computer and it had a fair market value of $4,000 at the time of the theft.

A painting, which 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 the above items, is $60,000.

Determine the total amount of Susan’s itemized deductions resulting from the theft.

84. Neal, single and age 37, has the following items for 2010:

Salary Casualty loss on business property Casualty loss on rental property Personal casualty gains Personal casualty losses (after $100 floor) Interest expense on personal residence

$50,000 (8,000) (5,000) 3,000 (12,000) (7,000)

Determine Neal’s taxable income for 2010.

85. In 2009, Robin Corporation incurred the following expenditures in connection with the development of a new product:

Salaries Supplies Market survey Depreciation

$50,000 20,000 10,000 15,000

In 2010, Robin incurred the following additional expenditures in connection with the development of the product: Salaries Supplies Depreciation Advertising

$75,000 15,000 17,000 8,000

In October 2010, Robin began receiving benefits from the project. If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction.

86. Green, Inc., manufactures and sells widgets. During 2010, an examination of the company records showed the following items:

Domestic production gross receipts Cost of goods sold for domestic products Expenses directly related to domestic production gross receipts (other than wages) W-2 wages paid to employees engaged in qualified domestic production activities Ratable portion of other expenses Total W-2 wages Taxable income

$3,000,000 750,000 300,000 300,000 100,000 325,000 1,600,000

Determine Green’s domestic production activities deduction for 2010.

87. Identify the factors that should be considered in determining whether a transaction is a bona fide loan or a gift.

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

89. 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.

90. Discuss the treatment of casualty and theft losses incurred with property in a transaction entered into for profit.

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

92. Why was the domestic production activities deduction (DPAD) enacted by Congress?

93. How is qualified production activities income (QPAI) calculated?

94. Sally is an employee of Blue Corporation. Last year, she purchased a very expensive computer with her own funds. She used the computer 100% for business purposes. During the current year, the computer was completely destroyed in a fire. Blue Corporation did not reimburse her for her loss. Discuss whether Sally’s loss will create or increase Sally’s net operating loss.

CHAPTER 7--DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES Key

1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $17,000 in final settlement of the account. James can take a $3,000 bad debt deduction in the current year.

FALSE

2. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year.

TRUE

3. Last year, taxpayer had a $10,000 business loan that was written off. Last year, taxpayer also had an NOL which taxpayer carried back two years and used in its entirety. If taxpayer collects the entire $10,000 during the current year, $10,000 needs to be included in gross income.

TRUE

4. Accrual basis taxpayers can use the reserve method for computing deductions for bad debts.

FALSE

5. If an account receivable written off during the current year is subsequently collected during the current year, the write-off entry is reversed.

TRUE

6. Bankruptcy is generally an indication that a debt is worthless.

TRUE

7. A nonbusiness bad debt is a debt unrelated to the taxpayer’s trade or business either when it was created or when it became worthless.

TRUE

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

FALSE

9. A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.

FALSE

10. A business bad debt can offset an unlimited amount of ordinary income.

TRUE

11. The amount of complete worthlessness on a nonbusiness bad debt is deducted at final settlement.

TRUE

12. A bona fide debt arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed sum of money.

TRUE

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

TRUE

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

FALSE

15. A loss is allowed for a security that declines in value.

FALSE

16. Several years ago, John purchased 2,000 shares of § 1244 stock from Red Corporation for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, Mike sold the Red Corporation stock for $3,000. Mike has a $9,000 ($3,000 – $12,000) ordinary loss for the current year.

FALSE

17. Taxpayers must sell or exchange their § 1244 stock in order to recognize an ordinary loss (does not apply to stock becoming worthless).

FALSE

18. Al, who is single, has a gain of $20,000 on the sale of §1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock. As a result, Al has a $10,000 net capital loss and a $50,000 ordinary loss.

TRUE

19. An individual may deduct a loss on rental property only if it meets the definition of a casualty loss.

FALSE

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

TRUE

21. A father cannot claim a casualty on his daughter’s personal use property.

TRUE

22. A casualty loss deduction is not allowed for losses resulting from a decline in value rather than an actual loss of property.

TRUE

23. If the amount of the insurance recovery for a theft of business property is greater than the asset’s fair market value but less than it’s adjusted basis, a loss is recognized.

TRUE

24. A theft loss is taken in the year the theft occurred.

FALSE

25. If a taxpayer receives reimbursement for a casualty loss sustained and deducted in a previous year, the total reimbursement must be included in gross income on the return for the year in which the reimbursement is received.

FALSE

26. If rental property is completely destroyed, the amount of the loss is the adjusted basis of the property at the time of the destruction reduced by $100 ($500 in 2009) and 10% of AGI. FALSE

27. The cost of repairs to damaged property may be acceptable as a measure of the loss in value of the property.

TRUE

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

FALSE

29. The amount of loss for partial destruction of business property is the lesser of the adjusted basis or the decline in fair market value.

TRUE

30. If personal casualty losses (after deducting the $100 floor) exceed personal casualty gains in 2010, the itemized deduction is always equal to the losses, to the extent they exceed 10% of adjusted gross income.

FALSE

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

FALSE

32. Losses on rental property are classified as deductions for AGI. TRUE

33. When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10% of adjusted gross income for the first year.

FALSE

34. A theft loss of investment property is a miscellaneous itemized deduction subject to the 2%-of-AGI floor.

FALSE

35. Research and experimental expenditures do not include expenditures for ordinary testing of materials for quality control.

TRUE

36. Expenses in connection with the acquisition of land are not research and experimental expenditures.

TRUE

37. If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project.

FALSE

38. For tax years beginning in 2010, the domestic production activities deduction (DPAD) for a sole proprietor is calculated by multiplying 9% times the lesser of (1) qualified production activities income (QPAI) or (2) taxable income or alternative minimum taxable income.

FALSE

39. If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction in 2010 because of the taxable income limitation, the product of the amount not allowed multiplied by 9% can be carried over for 5 years.

FALSE

40. The domestic production activities deduction (DPAD) for 2010 cannot exceed 50% of all W-2 wages paid to employees engaged in qualified domestic production activities by the taxpayer during the tax year.

TRUE

41. A theft or other casualty of personal use property can create an NOL for an individual.

TRUE

42. A taxpayer must carry any NOL incurred back two years.

FALSE

43. A farming NOL may be carried back 5 years.

TRUE

44. The amount of a farming loss cannot exceed the amount of the taxpayer’s NOL for the taxable year.

TRUE

45. 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 $18,000. How much loss can Peggy deduct and in which year?

A. $5,000 for the current year.

B. $5,000 for the prior year and $7,000 for the current year.

C. $7,000 for the current year.

D. $12,000 for the current year.

E. None of the above.

46. Jed is an electrician. Jed and his wife are cash 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 never able to collect the judgement nor the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year?

A. $0.

B. $2,000.

C. $3,000.

D. $5,000.

E. None of the above.

47. On June 2, 2009, Fred’s TV Sales sold Mark a large HD TV, on account, for $12,000. Fred’s TV Sales uses the accrual method. In 2010, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could expect to receive 60 cents on the dollar of the amount owed to him. In 2011, final settlement was made and Fred received $5,000. How much bad debt loss can Fred deduct and in which years?

A. 2009—$12,000.

B. 2009—$0; 2010—$8,000.

C. 2009—$0; 2010—$3,200; 2011—$0.

D. 2010—$4,800.

E. None of the above.

48. Red Corporation incurred a $12,000 bad debt last year. Red Corporation also had an $8,000 long-term capital gain last year. Red’s taxable income for last year was $28,000. During the current year, Red Corporation, unexpectedly, collected $5,000 on the debt. How should Red Corporation account for the $5,000 collection?

A. $0 income.

B. $3,000 income.

C. $4,000 income.

D. $5,000 income.

E. None of the above.

49. Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $87,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected.

A. $0.

B. $2,000 gain.

C. $3,000 loss.

D. $13,000 loss.

E. None of the above.

50. 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 $60,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends. 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 $8,000 of income for the current year.

D. Report $12,000 of income for the current year.

E. Report $13,000 of income for the current year.

51. Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is a cash basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is: A. No deduction.

B. $3,000 deduction.

C. $20,000 deduction.

D. $21,800 deduction.

E. None of the above.

52. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank’s Auto. As partial payment for the car, the dealer accepted the note from Sharon’s sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharon’s sister died.

Hank’s Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is the amount of loss, with respect to the note, that Hank’s Auto may claim on the current year tax return?

A. $0.

B. $3,000.

C. $15,500.

D. $18,000.

E. None of the above.

53. On September 3, 2009, Able purchased § 1244 stock in Red Corporation for $6,000. On December 31, 2009, the stock was worth $8,500. On August 15, 2010, Able was notified that the stock was worthless. How should Able report this item on his 2009 and 2010 tax returns?

A. 2009—$0; 2010—$6,000 ordinary loss.

B. 2009—$0; 2010—$6,000 long-term capital loss.

C. 2009—$2,500 short-term capital loss; 2010—$8,500 short-term capital loss.

D. 2009—$2,500 short-term capital gain; 2010—$3,800 ordinary loss.

E. None of the above.

54. On February 20, 2009, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2010, the stock became worthless. During 2010, Bill also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How should Bill treat these items on his 2010 tax return?

A. $4,000 long-term capital loss and $9,000 short-term capital loss.

B. $4,000 long-term capital loss and $3,000 short-term capital loss.

C. $8,000 ordinary loss and $3,000 short-term capital loss.

D. $8,000 ordinary loss and $5,000 short-term capital loss.

E. $8,000 long-term capital loss and $6,000 short-term capital loss.

55. John files a return as a single taxpayer. In 2010, 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 $8,000.

Determine John’s AGI for 2010.

A. ($5,000).

B. $0.

C. $45,000.

D. $48,000.

E. None of the above.

56. Bruce, who is single, had the following items for the current year:

· · · ·

Salary of $90,000.

Gain of $30,000 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 $7,000. 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.

A. $37,000.

B. $38,000.

C. $42,000.

D. $47,000.

E. None of the above.

57. On July 20, 2008, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000. On November 10, 2009, Matt purchased an additional 1,000 shares of Orange Corporation stock for $150,000. On September 15, 2010, Matt sold the 4,000 shares of stock for $80,000. How should Matt treat the sale of the stock on his 2010 return?

A. $94,000 ordinary loss.

B. $100,000 ordinary loss; $6,000 net capital gain.

C. $100,000 ordinary loss; $30,000 STCL. D. $130,000 ordinary loss; $36,000 LTCG. E. None of the above.

58. Which of the following events would produce a deductible loss?

A. Erosion of personal use land due to rain or wind.

B. Termite infestation of a personal residence over a several year period.

C. Damages to personal automobile resulting from a taxpayer’s willful negligence.

D. A misplaced diamond ring.

E. None of the above.

59. In 2010, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $48,000 AGI for the year.

Asset A B C

Adjusted Basis $9,200 3,000 3,700

Fair Market Value Before $8,000 4,000 1,900

Insurance After $1,000 –0– –0–

Recovery $2,000 500 800

Wally’s casualty loss deduction is:

A. $4,100.

B. $4,500.

C. $8,600.

D. $9,500.

E. None of the above.

60. Jim had a car accident in 2010 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 personal use. Jim received an insurance recovery of 80% of the value of the car at the time of the accident. If Jim’s AGI for the year is $50,000, determine his deductible loss on the car.

A. $900.

B. $6,000.

C. $10,500.

D. $30,000.

E. None of the above.

61. Norm’s car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2010.

The car’s adjusted basis at the time of the accident was $13,000. Its fair market value was $11,500. The car was covered by a $2,000 deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear 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. $0.

B. $100.

C. $500.

D. $9,500.

E. None of the above.

62. In 2010, Grant’s personal residence was damaged by fire. Grant was insured for 90% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows:

Cost basis Value before casualty Value after casualty

What is Grant’s allowable casualty loss deduction?

A. $0.

B. $6,500.

C. $6,900.

D. $10,000.

E. $80,000.

$170,000 250,000 150,000

63. 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:

Cost basis Value before the fire Value after the fire Insurance recovery

$250,000 400,000 100,000 270,000

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: Cost basis Value before the accident Value after the accident Insurance recovery

$80,000 6,000 20,000 –0–

What is John’s deductible casualty loss?

A. $0.

B. $15,800.

C. $15,900.

D. $35,900.

E. None of the above.

64. In 2010, Mary had the following items:

Salary Personal use casualty gain Personal use casualty loss (after $100 floor) Other itemized deductions

$30,000 10,000 17,000 4,000

Assuming that Mary files as head of household (has one dependent child), determine her taxable income for the current year.

A. $14,300.

B. $14,700.

C. $19,000.

D. $24,300.

E. None of the above.

65. In 2010, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:

Loss from damage to rental property Loss from theft of bonds Personal casualty gain Personal casualty loss (after $100 floor)

($6,000) (3,000) 4,000 (9,000)

Determine the amount of Morley’s itemized deduction from the losses.

A. $0.

B. $2,900.

C. $5,120.

D. $5,600.

E. None of the above.

66. In 2010, Theo had a salary of $30,000 and experienced the following losses:

Loss from damage to rental property Loss from theft of securities Personal casualty gain Personal casualty loss (after $100 floor)

($10,000) (5,000) 4,000 (3,000)

Determine the amount of Theo’s itemized deduction from these losses.

A. $0.

B. $2,800.

C. $2,900.

D. $4,580.

E. None of the above.

67. Alicia was involved in an automobile accident in 2010. Her car was used 50% for business and 50% 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 Alicia’s AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss.

A. $2,100.

B. $5,700.

C. $6,100.

D. $16,500.

E. None of the above.

68. Last year, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah’s insurance company told her that her policy did not cover the theft. Sarah’s other itemized deductions last year were $10,000. She had AGI of $30,000 last year. In August of the current year, 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 the current year.

A. None of the $5,000 should be included in gross income.

B. $2,900 should be included in gross income.

C. $5,000 should be included in gross income.

D. Last year’s return should be amended to include the $5,000.

E. None of the above.

69. 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. Alma has adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year.

A. $3,750.

B. $14,650.

C. $14,750.

D. $18,750.

E. None of the above.

70. In 2010, Juan’s home was burglarized. Juan had the following items stolen:

· · ·

Securities worth $15,000. Juan purchased the securities four years ago for $20,000.

New tools which Juan had purchased two weeks earlier for $6,000. Juan uses the tools in making repairs at an apartment house that he owns and manages.

An antique worth $12,000. Juan inherited the antique (a family keepsake) when the property was worth $9,000.

Juan’s homeowner’s policy had a $50,000 deductible clause for thefts. If Juan’s salary for the year is $60,000, determine the amount of his itemized deductions as a result of the theft.

A. $3,100.

B. $6,000.

C. $23,100.

D. $23,500.

E. None of the above.

71. Regarding research and experimental expenditures, which of the following are not qualified expenditures?

A. Costs of improving an existing pilot model.

B. Costs to develop a plant process.

C. Costs of developing a formula.

D. Costs of purchasing a building to be used for research.

E. None of the above.

72. Blue Corporation incurred the following expenses in connection with the development of a new product:

Salaries Utilities Materials Advertising Market survey Depreciation on machine

$100,000 18,000 25,000 5,000 3,000 9,000

Blue expects to begin selling the product next year. If Blue elects to expense research and experimental expenditures, determine the amount of the deduction for research and experimental expenditures for the current year.

A. $0.

B. $118,000.

C. $143,000.

D. $152,000.

E. $160,000.

73. Last year, Green Corporation incurred the following expenditures in the development of a new plant process:

Salaries Materials Utilities Quality control testing costs Management study costs Depreciation of equipment

$200,000 80,000 10,000 30,000 5,000 15,000

During the current year, benefits from the project began being realized in March. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year.

A. $50,833.

B. $55,833.

C. $56,667.

D. $61,000.

E. None of the above.

74. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $400,000 in 2010. Ivory’s domestic production activities deduction is: A. $24,000.

B. $36,000.

C. $40,000.

D. $54,000.

E. None of the above.

75. Amber operates her business as a sole proprietorship during 2010. Her domestic production activities deduction (DPAD) before any effect of the wage expense limitation is $70,000. The total W-2 wages that her sole proprietorship pays for the tax year are $110,000. The wages paid to employees not engaged in qualified domestic production activities are $20,000. Amber’s DPAD for 2010 is: A. $0.

B. $45,000.

C. $55,000.

D. $70,000.

E. None of the above.

76. Cream, Inc.’s taxable income for 2010 before any deduction for an NOL carryforward of $30,000 is $70,000. Cream’s qualified production activities income (QPAI) is $60,000. What is the amount of Cream’s domestic production activities deduction (DPAD) for 2010?

A. $1,200.

B. $1,800.

C. $2,400.

D. $3,600.

E. None of the above.

77. If a taxpayer has an NOL in 2010 of $20,000, of which $8,000 is attributable to a theft of personal use property, the taxpayer may: A. Carry all of the NOL of $20,000 back 5 years.

B. Carry all of the NOL of $20,000 back 3 years.

C. Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years.

D. All of the above.

E. None of the above.

78. Tonya had the following items for last year:

Salary Short-term capital gain Nonbusiness bad debt Long-term capital loss

$40,000 12,000 (10,000) (5,000)

For the current year, Tonya had the following items: Salary Collection of last year’s bad debt

$45,000 10,000

Determine Tonya’s adjusted gross income for the current year.

Salary Income under tax benefit rule Long-term capital loss carryover AGI

$45,000 10,000 (3,000) $52,000

Income on collection of nonbusiness bad debt (classified as STCL) to the extent of tax benefit in the prior year ($10,000 offset against short-term capital gain).

$10,000

79. Maria, who is single, had the following items for 2010:

Salary Loss on sale of § 1244 small business stock acquired 3 years ago Stock acquired 2 years ago became worthless during the year Long-term capital gain Nonbusiness bad debt Casualty gain on property held 4 years

$80,000 (60,000) (5,000) 17,000 (8,000) 4,000

Determine Maria’s adjusted gross income for 2010.

Salary Ordinary loss from § 1244 stock Capital gains and losses

$80,000 (50,000)

Long-term capital gain ($17,000 + $4,000) Less: Long-term capital loss [($60,000 – $50,000) + $5,000] Net long-term capital gain Less: Short-term capital loss Net short-term capital loss

$21,000

(15,000) $ 6,000 (8,000)

Adjusted gross income

(2,000) $28,000

80. Mike, single, age 31, had the following items for 2010:

Salary Nonbu siness bad debt Casual ties—i ndepen dent events

$42,000 (4,500)

Asset A (personal use property held for two years)—gain Securities (stolen)—loss Divide nds Interes t expens e on person al residen ce

2,000 (5,000) 1,000 10,000

Compute Mike’s taxable income for 2010.

Salary Dividends Casualty gain $2,000 (long-term capital gain) Nonbusiness bad (4,500) debt (short-term capital loss) Net short-term capital loss Adjusted gross income Less: Interest expense on personal residence Miscellaneous itemized deduction: casualty loss Personal exemption Taxable income

$42,0 00 1,000

(2,5 00) $40,5 00 (10,0 00) (5,00 0) (3,6 50) $21,8 50

81. Julie, who is single, has the following items for 2010:

· ·

· ·

· Determi ne the amount of Julie’s taxable income for the current year.

Salary – $100,000.

A hurricane completely destroyed Julie’s duplex during the current year. Julie lived in one-half of the duplex and rented out the other half. Julie paid $400,000 for the duplex and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex was worth $420,000 at the time of the destruction. Julie’s insurance policy paid her 90% of the fair market value of the duplex.

Household items destroyed in the hurricane had a basis of $15,000 and a fair market value of $8,500. There was no insurance recovery on the household items.

Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the painting was worth $10,000. Julie purchased the painting as an investment with the intent that she would sell it when its value exceeded $12,000. There was no insurance recovery on the painting.

Home mortgage interest – $10,000.

Salary Plus: Gain on rental duplex

AGI Less: Itemized deduction s

$100,000

Recove $189,0 ry 00 [($420, 000 ´ 90%) ´ 50%] Cost $200,0 (50% ´ 00 400,00 0) Less: (80,0 cost 00) recover y Adjust ed (120,00 basis 0) Casualt 69,000 y gain $169,000

Casualt y loss Dwelli ng Basis $200,0 ($400,000 00 ´ 50%) Recove (189,00 ry 0) Loss $ 11,0 00 Househ 8,5 old 00 items Total $ 19,5 loss 00 Less: (100) $100 floor 10% ´ (16,9 $169,0 00) 00 (AGI) Deduct $ 2,50 ible 0 loss Home 10,000 mortga ge interest

Taxable income

Other 4,00 miscell 0 aneous itemize d deducti on—pa inting Total (16,500) itemize d deducti ons Person (3,650 al ) exempt ion $148,850

82. Juanita, single and age 43, had the following items for 2010:

Salary Interest income Casualty loss on long-term business property Casualty loss on rental property Loss on theft of securities Personal casualty gains Personal casualty loss (after $100 floor) Other itemized deductions

$60,000 6,000 (15,000) (5,000) (8,000) 6,000 (13,000) (9,000)

Compute Juanita’s taxable income for 2010.

Salary Interest income Casualty loss on business property Casualty loss on rental property Personal casualty $6,000 gains Personal casualty (6,000) loss AGI Less: Itemized deductions Casualty loss [($13,000 – $6,000) – (10% ´ $46,000)] Theft of securities Other itemized deductions Personal exemption Taxable income

$60,000 6,000 (15,000) (5,000)

–0– $46,000 (2,400) (8,000) (9,000) (3,650) $22,950

83. 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’s rental property and 40% for her personal use. The cost of the computer was $8,000. Depreciation of $1,000 had been taken on the computer and it had a fair market value of $4,000 at the time of the theft.

A painting, which 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 the above items, is $60,000.

Determine the total amount of Susan’s itemized deductions resulting from the theft.

AGI before theft loss Less: los s on rental computer

$60,000

C o st ( $ 8, 0 0 0 ´ 6 0 % ) D e p re ci at io n A dj u st e d b a si s

$4,800

(1,000)

(3,800)

AGI

$56,200

Painting loss (investme nt property) Casualty loss

$10,000

Total itemized deduction s

C $ 1,600 o m p ut er ( $ 4, 0 0 0 ´ 4 0 % ) S 3,000 il v er w ar e C 30,000 a s h T $34,600 ot al L (100) e ss : $ 1 0 0 fl o o r 1 (5,620) 28,880 0 % ´ $ 5 6, 2 0 0 ( A G I) $38,880

84. Neal, single and age 37, has the following items for 2010:

Salary Casualty loss on business property Casualty loss on rental property Personal casualty gains Personal casualty losses (after $100 floor) Interest expense on personal residence

$50,000 (8,000) (5,000) 3,000 (12,000) (7,000)

Determine Neal’s taxable income for 2010.

Salary Casualty loss on business property Casualty loss on rental property Personal casualty gains Personal casualty losses AGI Less: Itemized deductions Casualty loss ($12,000 – $3,000) Less: 10% ´ $37,000 (AGI) Casualty loss deduction Interest expense Personal exemption Taxable income

$50,000 (8,000) (5,000) $3,000 (3,000)

–0– $37,000

$9,000 (3,700) $5,300 7,000

(12,300) (3,650) $21,050

85. In 2009, Robin Corporation incurred the following expenditures in connection with the development of a new product:

Salaries Supplies Market survey Depreciation

$50,000 20,000 10,000 15,000

In 2010, Robin incurred the following additional expenditures in connection with the development of the product: Salaries Supplies Depreciation Advertising

$75,000 15,000 17,000 8,000