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

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Question 41

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The amount of loss for partial destruction of business property is the decline in fair market value of the business property.

A) True
B) False

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Question 42

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

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Question 43

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Red Company is a proprietorship owned by Sally, a single individual. Red manufactures and sells widgets. During 2012, an examination of Red's records shows the following items: Determine Sally's domestic production activities deduction for 2012.

On July 20, 2010, 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, 2011, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2012, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2012 return?

The domestic production activities deduction (DPAD) for 2012 cannot exceed 50% of all W-2 wages paid to employees by the taxpayer during the tax year.

Which of the following events would produce a deductible loss?

A farming NOL may be carried back 2 years.

A theft loss is taken in the year the theft is discovered.

If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction in 2012 because of the taxable income limitation, the product of the amount not allowed multiplied by 9% can be carried over for 5 years.

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:

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

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.

In 2012, Juan's home was burglarized.Juan had the following items stolen: Juan's homeowner's policy had a $50,000 deductible clause for thefts.If Juan's salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft.

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

Jed is an electrician. Jed 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 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?

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.

For the year 2012, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber's DPAD for 2012 is:

On June 2, 2011, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000. Fred's TV Sales uses the accrual method. In 2012, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could not expect to receive any of the amount owed to him. In 2013, final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2013?

Mike, single, age 31, had the following items for 2012: Compute Mike's taxable income for 2012.

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