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

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Question 21

True/False

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

A) True
B) False

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Question 22

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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.

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

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Question 23

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Last year,Green Corporation incurred the following expenditures in the development of a new plant process: 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 farming NOL may be carried back 5 years.

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.

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:

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?

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

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?

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.

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:

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 taxpayer must carry any NOL incurred back two years.

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

In 2010,Morley,a single taxpayer,had an AGI of $30,000 before considering the following items: Determine the amount of Morley's itemized deduction from the losses.

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

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

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

"Other casualty" means casualties similar to those associated with fires,storms,or shipwrecks.

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