Exam 25: Losses and Bad Debts

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

Kayla reported the following amounts in her 2019 tax return: Interest income \ 6,000 Loss from sole proprietorship (20,000) AGI (14,000) Standard deduction (12,200) (\ 26,200) Kayla has generated an NOL of

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

Harley,a single individual,provided you with the following information for this year: Income: Salary from part-time employment \ 16,000 Interest income from savings 1,000 Net long-term capital gain from investment property 3,000 Deductions: Net business loss sales of \ 100,000 less expenses of \ 130,000) (\ 30,000) Standard deduction (12,200) Net-operating loss carryover from last year (3,000) What is the amount of Harley's net operating loss for this year?

In October 2019,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 2020.Creditors are informed that no assets are available for payment.Jonathon Remodeling Co.will report

Partnerships and S corporations must classify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

An individual is considered to materially participate in an activity if any of the following tests are met with the exception of

When business property involved in a casualty is totally destroyed,the amount of the loss is limited to the lesser of the taxpayer's adjusted basis in the property or the reduction in FMV.

When the taxpayer anticipates a full recovery on a casualty loss of business property but receives less than full recovery in a subsequent year,the unrecovered portion may be deducted.

Taj operates a sole proprietorship,maintaining the business records under the cash method of accounting.Taj performs services for a client and sends the client a bill for $12,000.Six months later,before payment is received by Taj,the client files bankruptcy,with no assets available for unsecured creditors such as Taj.Taj will deduct

A taxpayer wishes to take a deduction for a worthless debt.Without proper documentation,the taxpayer faces the risk that the IRS will assert that

A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.

A net operating loss (NOL)occurs when taxable income for any year is negative because itemized deductions exceed business income.

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 taxpayer guarantees another person's obligation and is forced to pay the debt under the terms of the guarantee.The original debtor does not repay the taxpayer.The taxpayer/guarantor may deduct the loss.

Atkon Corporation acquired 90% of the stock of Beta Corporation three years ago.Both corporations are located in the United States.Beta has been an energy drink producer,but unfortunately has suffered substantial losses due to government fines and lawsuits.All of its revenues had been from the sales of the energy drinks.Beta has now filed for bankruptcy and is closing the business with no assets remaining for shareholders.Atkon Corporation will recognize

The amount of loss realized on the sale of property is computed by subtracting adjusted basis from amount realized.

In February 2019,the storage building used in Amelia's business is damaged by a windstorm.It had an adjusted basis of $150,000 at that time.Due to changing insurance companies,the building had been appraised recently,with a resulting FMV of $200,000.After the storm,the building appraised at $120,000.Amelia has received no insurance reimbursement by December 31,but expects to recover 90 percent of the loss.In the subsequent year,the insurance company pays Amelia $50,000.Amelia's AGI is $85,000 in 2019,and her 2020 AGI is $80,000.Amelia suffers no other casualty losses in either year.Amelia may deduct

For a bad debt to be deductible,the taxpayer must have a basis in the debt.

A bona fide debtor-creditor relationship can never exist in the case of related parties.