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

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Question 41

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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

F) C) and D)
G) A) and D)

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Question 42

Multiple Choice

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In 2017, Mary had the following items: ​ Assuming that Mary files as head of household (has one dependent child) , determine her taxable income for 2017.

A) $12,550
B) $12,800
C) $13,900
D) $21,900
E) None of the above

F) D) and E)
G) All of the above

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Question 43

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The current position of the IRS is that a personal casualty loss deduction is not allowed for losses resulting from termites.

Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income.

In 2017, Tan Corporation incurred the following expenditures in connection with the development of a new product: ​ Tan began selling the product in November 2017. If Tan elects to amortize research and experimental expenditures, determine Tan's deduction for 2017.

Elizabeth has the following items for the current year: ​ In calculating Elizabeth's net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss) ?

In 2016, 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 $2,000. She had AGI of $30,000 last year. In August of 2017, 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 2017.

A bona fide debt cannot arise on a loan between father and son.

In 2017, Theo, an employee, had a salary of $30,000 and experienced the following losses: ​ Determine the amount of Theo's itemized deduction from these losses.

Al, who is single, has a gain of $40,000 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 $40,000 ordinary loss.

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

On September 3, 2016, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2016, the stock was worth $85,000. On August 15, 2017, Able was notified that the stock was worthless. How should Able report this item on his 2017 tax return?

Susan has the following items for 2017: ∙ Loss on rental property caused by termites-$110,000. Insurance covered 80% of the loss. ∙ Loss on personal use automobile-$10,000. The insurance policy does not cover the first $3,000 of loss. Susan decided not to file a claim for the loss. ∙ Loss on a painting stolen from Susan's house. Susan purchased the painting three years ago as an investment. She paid $40,000 for the painting and it was worth $35,000 at the time of the theft. The painting was insured for the fair market value.∙ Salary-$40,000. Determine Susan's AGI and total amount of itemized deductions for 2017.

Steve and Holly have the following items for the current year: ​ In calculating their net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss) ?

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

A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.

Gary, who is an employee of Red Corporation, has the following items for 2017: ​ Determine Gary's AGI and total amount of itemized deductions for 2017.

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 an accrual basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is:

On February 20, 2016, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2017, the stock became worthless. During 2017, 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 2017 tax return?

On July 20, 2016, 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, 2016, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2017, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2017 return?