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

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

Several years ago, John purchased 2,000 shares of Red Corporation § 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.

Research and experimental expenditures do not include expenditures for ordinary testing of materials for quality control.

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 amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year.

In 2012, Wally had the following insured personal casualty losses (arising from one casualty).Wally also had $42,000 AGI for the year before considering the casualty. Wally's casualty loss deduction is:

Green, Inc., manufactures and sells widgets. During 2012, an examination of the company records showed the following items: Determine Green's domestic production activities deduction for 2012.

Last year, 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 $10,000. She had AGI of $30,000 last year. In August of the current year, 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 the current year.

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

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.

Roger, an individual, owns a proprietorship called Green Thing. For the year 2012, Roger has 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.

If personal casualty losses (after deducting the $100 floor) exceed personal casualty gains in 2012, the itemized deduction is always equal to the losses, to the extent they exceed 10% of adjusted gross income.

If a taxpayer has an NOL in 2012 of $20,000, of which $8,000 is attributable to a theft of rental use property, the taxpayer may:

A farming NOL may be carried back 2 years.

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.

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.

A business bad debt can offset an unlimited amount of ordinary income.

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.

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

A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.