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

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Question 1

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In 2019, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: $\begin{array}{lc}\text { Loss from damage to rental property } & (\$ 6,000) \\\text { Loss from theft of bonds } & (3,000) \\\text { Personal casualty gain } & 4,000 \\\text { Personal casualty loss (after } \$ 100 \text { floor) } & (9,000) \end{array}$ The personal casualties occurred in a Federally declared disaster area. 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 these.

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

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Question 2

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Currently, a net operating loss can be carried forward only (no carryback exists).

A) True
B) False

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Question 3

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A business theft loss is taken in the year of the theft.

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

Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback year.

Roger, an individual, owns a proprietorship Green Options. For the year 2019, Roger reports the following items: - Business income- $\$ 200,000$ . - Business expense- $\$ 150,000$ . ∙ Loss on a completely destroyed business machine. The machine had an adjusted basis of $25,000 and a fair market value of $20,000. ∙ Loss on a business truck. The truck had an adjusted basis of $8,000. The repairs to fix the truck cost $10,000. Determine Roger's adjusted gross income for 2019.

Khalid, who is single, reports the following items for 2019: $\begin{array}{lc}\text { Salary } & \$ 40,000 \\\text { Interest income on U.S. Treasury bonds } & 8,000 \\\text { Loss on theft of securities } & (60,000) \text { Interest income on New } \\\text { York state bonds } & 12,000\end{array}$ What is Khalid's NOL for 2019?

A loss is not allowed for a security that declines in value.

In the computation of a net operating loss, which of the following items is not added to the negative taxable income?

Nonbusiness income for net operating loss purposes includes dividends received.

Several years ago, John purchased 2,000 shares of Red Corporation's § 1244 stock from Mark for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining Red Corporation stock for $3,000. John has a $17,000 ($3,000 - $20,000) ordinary loss for the current year.

Jason, married and filing jointly, reports the following income for 2019: $\begin{array}{lc}\text { Salary }&\$70,000\\\text { Loss on the sale of } \& 1244 \text { stock held }\\\text { for five years } & (110,000) \text { Dividends } \\& 25,000 \\\text { Interest income } & 10,000 \\\text { Itemized deductions (no casualty losses) } & (20,000)\end{array}$ Jason has four dependent children. Calculate his net operating loss for 2019.

If investment property is stolen, the amount of the loss is the adjusted basis of the property at the time of the theft reduced by $100 and 10% of AGI.

If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized deduction.

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

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

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.

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?

In 2019, Wally had the following insured personal casualty losses (arising from one casualty in a Federally declared disaster area) . Wally also had $42,000 AGI for the year before considering the casualty. $\begin{array}{ccccc}&&\text { Fair Market Value }\\\text { Asset }& \text { Adjusted Basis }& \text { Before }& \text {After }& \text {Insurance Recovery }\\\text { A } & \$ 9,200 & \$ 8,000 & \$ 1,000 & \$ 2,000 \\\text { B } & 3,000 & 4,000 & -0- & 4,000 \\\text { C } & 3,700 & 1,700 & -0- & 900\end{array}$ Wally's casualty loss deduction is:

In 2017, Amos had AGI of $50,000. In December 2017, Amos also had a diamond ring stolen that cost $20,000 and was worth $17,000 at the time of the theft. He itemized deductions on his 2017 tax return. In 2019, after a variety of investigations, Amos recovered $17,000 from the insurance company. Therefore, he must include $11,900 in gross income on the tax return for the current year.