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Joseph has AGI of $170,000 before considering the $20,000 rental loss for property which he actively manages. How much of the rental loss can he deduct? A) $0 B) $10,000 C) $20,000 D) $25,000
A) $0 His AGI exceeds $150,000, so no portion of the rental loss is deductible.
Wesley completely demolished his personal automobile in a car accident. Damage to the auto was estimated at $35,000. Wesley had purchased the car a few years ago for $60,000. He received an insurance reimbursement of $28,000. His adjusted gross income this year was $55,000 and he incurred no other losses during the year. What amount can he deduct as a casualty loss on his income tax return after limitations? A) $1,400 B) $1,500 C) $6,900 D) $7,000
A) $1,400 ($35,000 - $28,000 - $100 - $5,500) = $1,400
Vera has a key supplier for her business who was facing cash flow problems which would impair Vera's ability to get shipments of key components for her production. Vera made a $10,000 loan to the supplier. Unfortunately the supplier filed for bankruptcy and has gone out of business without repaying Vera. Vera will be able to recognize a loss of A) $10,000. B) $3,000. C) $7,000. D) 0.
A) $10,000. The motivation for the loan is to assist the functioning of Vera's business so it will be considered a business bad debt. An ordinary loss of the full amount will be allowed.
Brandon, a single taxpayer, had a loss of $48,000 from a rental real estate activity in which he actively participated. He also had $27,000 of income from another rental real estate activity in which he actively participated. He acquired both investments in 2014. If Brandon has no other passive income or losses and has adjusted gross income of $84,000 before considering passive activities, how much loss from rental activities can he use to offset his nonpassive income? A) $21,000 B) $24,000 C) $25,000 D) $45,000
A) $21,000 $27,000 of the loss offsets $27,000 income from the other passive activity, leaving a net.$21,000 loss. The $21,000 net rental loss may offset nonpassive income using the special allowance of up to $25,000.
Juan has a casualty loss of $32,500 on investment property after receiving an insurance settlement. This is Juan's only casualty transaction this year. Juan's loss is A) an ordinary loss. B) a capital loss. C) a Sec. 1231 loss. D) a Sec. 1244 loss.
A) an ordinary loss. Although property held as an investment is a capital asset, the $32,500 loss is ordinary since a casualty is not a sale or exchange.
All of the following losses are deductible except A) decline in value of securities. B) total worthlessness of securities. C) sale or exchange of business property. D) destruction of personal use property by fire, storm, or casualty.
A) decline in value of securities. Securities must be sold or determined to be worthless in order for the loss to be realized and then recognized.
Lewis died during the current year. Lewis owned passive activity property with a FMV of $61,000 and a basis of $48,000. Suspended losses of $15,000 were attributable to the property. How much of the suspended loss is deductible on Lewis's final income tax return? A) $0 B) $2,000 C) $13,000 D) $15,000
B) $2,000 ($61,000 - $48,000) is increase in basis; $13,000 of suspended losses is lost. $15,000 - $13,000 = $2,000.
In October 2014, Jonathon Remodeling Co., an accrual-method taxpayer, remodels and renovates an office building for Dale and bills him $30,000. Dale signs a note for the debt. Dale keeps delaying payment and files bankruptcy in 2015. Creditors are informed that no assets are available for payment. Jonathon Remodeling Co. will report A) $0 income in both years. B) $30,000 income in 2014 and a bad debt deduction of $30,000 in 2015. C) $30,000 income in 2014 and a STCL of $30,000 in 2015 limited to $3,000 after netting. D) $30,000 income in 2014 and then must amend last year's return to show $0 income when advised of the bankruptcy.
B) $30,000 income in 2014 and a bad debt deduction of $30,000 in 2015. Since Jonathon Remodeling Co. is an accrual-basis taxpayer, the $30,000 is recognized in income when billed in 2014. The debt is a business bad debt since it is related to a trade or business. The nonpayment in 2015 results in a business bad debt which is an ordinary loss deductible in 2015.
Leonard owns a hotel which was damaged by a hurricane. The hotel had an adjusted basis of $1,000,000 before the hurricane. A recent appraisal determined that the hotel's FMV was $1,500,000 before the hurricane and $700,000 afterwards. Leonard received insurance proceeds of $500,000. His AGI is $60,000. What is the amount of his deductible casualty loss? A) $293,900 B) $300,000 C) $793,900 D) $800,000
B) $300,000 For business property partially destroyed, the amount of the loss is the lower of the decline in FMV or adjusted basis. The decline in FMV is $800,000. Leonard received insurance proceeds of $500,000, resulting in a deductible casualty loss of $300,000.
Which of the following expenses or losses could create a net operating loss for an individual taxpayer? A) large losses on sales of investment assets B) an operating loss from a sole proprietorship C) large charitable contributions D) all of the above
B) an operating loss from a sole proprietorship Generally only business losses will allow the creation of an NOL.
Lena owns a restaurant which was damaged by a tornado. The following assets were partially destroyed: Basis Reduction in FMV Insurance Payment Building $150,000 $200,000 $100,000 Equipment $30,000 $20,000 $10,000 Lena has AGI of $50,000. What is the amount of Lena's deductible casualty loss? A) $54,900 B) $60,000 C) $70,000 D) $180,000
B) $60,000 (150,000 - 100,000) + (20,000 - 10,000) = $60,000. The amount of the loss is the lower of the property's adjusted basis or the decline in FMV, reduced by the insurance proceeds. Since the property was used in Lena's business, there is no 10% of AGI and $100 floor.
Jamie sells investment real estate for $80,000, resulting in a $15,000 loss. Jamie's loss is A) an ordinary loss. B) a capital loss. C) a Sec. 1231 loss. D) a Sec. 1244 loss.
B) a capital loss. Real estate held for investment is considered a capital asset, therefore the loss on the sale or exchange is a capital loss.
Lucia owns 100 shares of Cronco Inc. which she purchased on December 1 of last year for $10,000. The stock is not Sec. 1244 stock. On July 1 of the current year, Lucia receives notice from the bankruptcy court that Conco Inc. has been liquidated, and there are no assets remaining for shareholders. As a result, Lucia will have A) a short-term capital loss of $10,000. B) a long-term capital loss of $10,000. C) an ordinary loss of $10,000. D) no loss allowed.
B) a long-term capital loss of $10,000. Worthlessness of securities is deemed to occur at the end of the year so the loss will be treated as long-term capital loss.
Tom and Shawn own all of the outstanding stock of Brady Corporation (a retail store operated as a C corporation). This year, Brady generates taxable income of $20,000 from active business operations, and also reports investment interest of $22,000 and losses of $28,000 from a passive activity. As a result, Brady Corporation reports A) net income of $42,000. B) interest income of $22,000 and a passive loss carryover of $8,000. C) business income of $20,000 and a passive loss carryover of $6,000. D) business income of $20,000, interest income of $22,000, and a passive loss carryover of $28,000.
B) interest income of $22,000 and a passive loss carryover of $8,000. Because Brady is a closely-held C corporation, the $20,000 of active business income may be offset by $20,000 of the passive loss. The remaining $8,000 loss may be carried over. The investment interest of $22,000 is currently taxable.
During the year, Mark reports $90,000 of active business income from his law practice. He also owns two passive activities. From Activity A, he earns $20,000 of income, and from Activity B, he incurs a $30,000 loss. As a result, Mark A) reports AGI of $80,000. B) reports AGI of $90,000 with a $10,000 passive loss carryover. C) reports AGI of $90,000 with a $30,000 passive loss carryover. D) reports AGI of $110,000 with a $30,000 passive loss carryover.
B) reports AGI of $90,000 with a $10,000 passive loss carryover. B) Mark offsets $20,000 of B's loss against A's income and carries forward the $10,000 loss. His AGI is $90,000 from the active business income.
An individual is considered to materially participate in an activity if any of the following tests are met with the exception of A) the individual participates in the activity for more than 500 hours during the year. B) the individual participates in the activity for 75 hours during the year, and that participation is more than any other individual's participation for the year. C) the individual has materially participated in the activity in any five years during the immediate preceding 10 taxable years. D) the individual's participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals.
B) the individual participates in the activity for 75 hours during the year, and that participation is more than any other individual's participation for the year. The individual participates in the activity for more than 100 hours (not 75) during the year, and that participation is more than any other individual's participation for the year.
Nicole has a weekend home on Pecan Island that she purchased in 2005 for $250,000. Recently, the home was appraised at $260,000. After the appraisal, a hurricane hit Pecan Island, severely damaging Nicole's home. An appraisal placed the value of the home at $140,000 after the hurricane. Because of its prohibitive cost, Nicole had no hurricane insurance. Before any reductions or limitations, Nicole's casualty loss amount is A) $0. B) $10,000. C) $120,000. D) $140,000.
C) $120,000. 260,000 (FMV Before casualty)-140,000 (FMV after casualty)=120,000
Shaunda has AGI of $90,000 and owns rental property generating a $27,000 loss. She actively manages the property. Her deductible loss is A) $0. B) $13,500. C) $25,000. D) $27,000.
C) $25,000. Since her AGI is less than $100,000, she is allowed a $25,000 rental loss. She has a $2,000 suspended loss.
Jorge owns activity X which produced a $20,000 passive loss last year. Jorge's only income last year was wages of $30,000. Jorge is a material participant in activity X this year when it produces a $14,000 loss. This year, Jorge's wages are $40,000. This year, Jorge also has passive activity income from activity Y of $16,000. What is the total passive activity loss carryover to next year? A) $0 B) $3,000 C) $4,000 D) $18,000
C) $4,000 $20,000 carryover from prior year - $16,000 current passive income offset = $4,000 carryover to next year. This year's $14,000 active business loss from Activity X may offset Jorge's wages.
Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara's current year AGI is a(n) A) increase of $6,000. B) decrease of $13,000. C) 0. D) decrease of $7,000.
C) 0. The suspended passive loss will be allowed to offset this year's non-passive income from the activity, but the excess suspended passive loss of $7,000 will carryforward.
Martha, an accrual-method taxpayer, has an accounting practice. In 2013, she performs tax analyses for Arnold and sends him an invoice for $10,000. In 2014, Martha sells her practice and all accounts to David. Arnold's debt becomes worthless that year after David has purchased the practice. The result is A) Martha deducts a nonbusiness bad debt in 2014. B) Martha deducts a business bad debt in 2014. C) David deducts a business bad debt in 2014. D) David deducts a nonbusiness bad debt in 2014.
C) David deducts a business bad debt in 2014. Since David acquired the account upon acquiring the business, he is entitled to a business bad debt deduction because the debt was incurred in the trade or business in which David is currently engaged.
In 2013 Grace loaned her friend Paula $12,000 to invest in various stocks. Paula signed a note to repay the principal with interest. Unfortunately the market for that industry sector plunged, and Paula incurred large losses. In 2014 Paula declared personal bankruptcy and Grace was unable to collect any of her loan. Grace had no other gains or losses last year or this year. The result is A) Grace deducts a business bad debt of $12,000 in 2014. B) Grace deducts a $12,000 nonbusiness bad debt as a short-term capital loss in 2014. C) Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2014 and carries $9,000 over to subsequent years. D) Grace deducts a business bad debt of $3,000 in 2014 and carries $9,000 over to subsequent years.
C) Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2014 and carries $9,000 over to subsequent years. The debt is a nonbusiness bad debt since it is not related to Grace's trade or business. Therefore, the $12,000 loss is treated as a short-term capital loss, $3,000 of which is deductible this year and $9,000 of which may be carried over to next year.
Sarah had a $30,000 loss on Section 1244 stock, a $15,000 loss on sale of a personal use automobile and a $8,000 loss on stock that is not classified as Section 1244. Without regard to net capital loss limitations, Sarah should recognize A) a ordinary loss of $38,000. B) a capital loss of $53,000. C) an ordinary loss of $30,000 and a capital loss of $8,000. D) an ordinary loss of $30,000 and a capital loss of $23,000.
C) an ordinary loss of $30,000 and a capital loss of $8,000. $30,000 Section 1244 ordinary loss + $8,000 capital loss. The loss on the sale of personal use assets, the automobile, is not deductible.
The amount realized by Matt on the sale of property to Caitlin includes all of the following with the exception of A) cash received by Matt. B) mortgage on the property that is assumed by Caitlin. C) mortgage on the property paid off by Matt prior to the sale. D) the FMV of any other property received by Matt in the transaction.
C) mortgage on the property paid off by Matt prior to the sale. Cash received, the mortgage assumed by the buyer, and the FMV of property received in the transaction are all part of amount realized.
Joy reports the following income and loss: Salary $ 120,000 Income from activity A 60,000 Loss from activity B ( 35,000) Loss from activity C ( 55,000) Activities A, B, and C are all passive activities. Based on this information, Joy has A) adjusted gross income of $90,000. B) salary of $120,000 and deductible net losses of $30,000. C) salary of $120,000 and net passive losses of $30,000 that will be carried over. D) salary of $120,000, passive income of $60,000, and passive loss carryovers of $90,000.
C) salary of $120,000 and net passive losses of $30,000 that will be carried over. The losses from passive activities B and C may offset and eliminate the income from passive activity A resulting in a net passive loss of $30,000 ($60,000 income less $90,000 loss). The passive loss of $30,000 may not offset the salary and must be carried over to the next tax year.
A fire totally destroyed office equipment and furniture which Monica uses in her business. The equipment had an adjusted basis of $15,000 and a FMV of $10,000 before the fire. The furniture's adjusted basis was $5,000 and its FMV was $2,000 before the fire. Monica's AGI for the year is $60,000. Monica does not have insurance on the destroyed assets. How much is Monica's deductible casualty loss? A) $5,900 B) $12,000 C) $13,900 D) $20,000
D) $20,000 For business property totally destroyed, the amount of the loss is the property's adjusted basis. There is no reduction for the $100 floor and 10% of AGI for business property. The loss equals the $20,000 adjusted bases of the property destroyed ($15,000 + $5,000).
In 2000, Michael purchased land for $100,000. Over the years, economic conditions deteriorated, and the value of the land declined to $60,000. Michael sells the property in this year, when it is subject to a $30,000 nonrecourse mortgage. The buyer pays Michael $34,000 cash and takes the property subject to the mortgage. Michael incurs $5,000 in real estate commissions. Michael's gain or loss on the sale is A) $4,000 gain. B) $1,000 loss. C) $36,000 loss. D) $41,000 loss.
D) $41,000 loss. ($30,000 + $34,000 - $5,000) - $100,000 = $41,000 loss
Which of the following is not generally classified as a passive activity? A) an activity in which the taxpayer does not materially participate B) a limited partnership interest C) rental real estate D) a business in which the taxpayer owns an interest and works 1,000 hours a year
D) a business in which the taxpayer owns an interest and works 1,000 hours a year An individual participating in a business for more than 500 hours per year is generally classified as a material participant.
All of the following are true of losses from the sale or worthlessness of small business corporation (Section 1244) stock with the exception of A) the stock must be owned by an individual or a partnership. B) the stock must have been issued by a domestic corporation. C) the stock must have been issued for cash or property other than stock or securities. D) a single taxpayer may deduct, as ordinary losses, up to a maximum of $100,000 per tax year with the remainder treated as capital losses.
D) a single taxpayer may deduct, as ordinary losses, up to a maximum of $100,000 per tax year with the remainder treated as capital losses. D) Single taxpayers may deduct up to $50,000 per tax year.
An individual taxpayer has negative taxable income for the year. In calculating the net operating loss created, which of the following expenses or losses will be added back to the negative taxable income? A) capital losses B) personal and dependency exemptions C) nonbusiness deductions in excess of nonbusiness income D) all of the above
D) all of the above The NOL is due to business losses so all of the above will be added back in the computation of the NOL.
A taxpayer's rental activities will be considered a trade or business, rather than a passive activity, if A) the taxpayer performs more than 750 hours of work during the year managing the rental properties B) the taxpayer performs more than 500 hours of work during the year managing the rental properties. C) more than half of the taxpayers personal services performed in all business activities during the year are spent managing the rental properties. D) conditions A and C, but not B, are satisfied.
D) conditions A and C, but not B, are satisfied. Rental activities are deemed to be passive unless both the 751 hour test and more than half of the work hours test are met.
Jeff owned one passive activity. Jeff sold the activity and realized a $2,000 gain on the sale. Prior to the sale, he realized a current year loss from the activity of $6,000. In addition, he has suspended losses from prior years of $7,000. What is the net impact on Jeff's AGI this year due to the passive activity? A) increase of $2,000 B) no net change C) decrease of $4,000 D) decrease of $11,000
D) decrease of $11,000 Due to the sale, the current year loss and the suspended loss will be recognized. $2,000 gain - $6,000 current loss - $7,000 suspended loss = $11,000 loss.
Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss. Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie. During this year, activity B produces a $9,000 loss. In addition, Charlie acquires an investment in activity X, a passive activity, this year. Charlie's share of activity X's income is $13,000. Charlie's salary this year is $70,000. As a result, this year Charlie must A) offset B's loss carryover against X's current income and carry over $9,000 loss from activity B to next year. B) offset B's carryover loss and current loss against X's income first and then offset any remaining loss against salary. C) offset B's $9,000 loss against X's $13,000 income and offset B's loss carryover against the remaining $4,000 of X's income. D) offset B's current $9,000 loss against his salary and offset B's loss carryover against X's income and carry over $4,000 of loss to next year.
D) offset B's current $9,000 loss against his salary and offset B's loss carryover against X's income and carry over $4,000 of loss to next year. Charlie may deduct Activity B's current $9,000 loss since it is not a passive activity. He may also offset passive activity X's income of $13,000 with the $17,000 carryover from Activity B resulting in a $4,000 carryover.
Last year, Abby loaned Pat $10,000 as a gesture of their friendship. Although Pat had signed a note payable that contained interest payments and a maturity date, the loan had not been repaid this year when Pat died insolvent. For this year, assuming that the loan was bona fide, Abby should account for nonpayment of the loan as a(n) A) itemized deduction. B) ordinary loss. C) long-term capital loss. D) short-term capital loss.
D) short-term capital loss. Because the debt is not related to Abby's trade or business, it is a nonbusiness bad debt. All nonbusiness bad debts are deductible as short-term capital losses.
A taxpayer incurs a net operating loss in the current year. With respect to the application of the NOL, A) the taxpayer will carry back the NOL three years first, then carry forward any balance for five years. B) the taxpayer must carry forward the loss and has up to 20 years to use it. C) the taxpayer can carry forward the loss indefinitely until there is sufficient taxable income to use it up. D) the taxpayer will first carry back the NOL for two years, then carryforward the balance for a period of 20 years, or the taxpayer can elect to only carry forward the loss for the 20-year allowable period.
D) the taxpayer will first carry back the NOL for two years, then carryforward the balance for a period of 20 years, or the taxpayer can elect to only carry forward the loss for the 20-year allowable period. The normal application period for utilizing the NOL is carry back two years and then carry forward for up to 20 years, but the taxpayer does have the option to forego the carryback period.
Which of the following is most likely not considered a casualty? A) fire loss B) water damage caused by a busted water heater C) death of a pine tree due to a two-day infestation of pine beetles D) water damage to the walls and ceiling of a taxpayer's personal residence as the result of gradual deterioration of the roof
D) water damage to the walls and ceiling of a taxpayer's personal residence as the result of gradual deterioration of the roof Water damage due to the gradual deterioration of a roof is not a casualty. It is not sudden or unexpected.
