Question 1

One of the requirements which must be met for stock to be considered Section 1244 stock is that the stock must be owned by an individual or a partnership.

Accepted Answer

A) True 
 B)False

Question 2

A taxpayer uses an allowance method (i.e.,aging method)of calculating bad debt expense for purposes of the business' financial statements.For income tax purposes,she will also use the allowance method to calculate the bad debt deduction.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is most likely not considered a casualty?

Accepted Answer

A) fire loss 
B) water damage caused by the bursting of a water heater 
C) death of pine trees on a Christmas tree farm due to a two-day infestation of pine beetles 
D) water damage to the walls and ceiling of a building as the result of gradual deterioration of the roof

Question 4

Jamie sells investment real estate for $80,000,resulting in a $15,000 loss.Jamie's loss is

Accepted Answer

A) an ordinary loss. 
B) a capital loss. 
C) a Sec.1231 loss. 
D) a Sec.1244 loss.

Question 5

Jen and Saachi are the owners of J&S Legal Services,P.C.,an incorporated law firm treated as a C corporation for tax purposes.Jen and Saachi work full-time in the firm,performing all of the legal services.This year,J&S generates taxable income of $100,000 from the active business operations,and also reports investment interest income of $22,000 and losses of $28,000 from a passive activity.As a result,J&S Legal Services,P.C.reports taxable income of

Accepted Answer

A) $122,000. 
B) $100,000. 
C) $94,000. 
D) $97,000.

Question 6

Martha,an accrual method taxpayer,has an accounting practice.In 2018,she performs tax analyses for Arnold and sends him an invoice for $10,000.In 2019,Martha sells her practice and all accounts to David.Arnold's debt becomes worthless that year after David has purchased the practice.The result is

Accepted Answer

A) Martha deducts a nonbusiness bad debt in 2019. 
B) Martha deducts a business bad debt in 2019. 
C) David deducts a business bad debt in 2019. 
D) David deducts a nonbusiness bad debt in 2019.

Question 7

A loss on business or investment property which is abandoned is deductible as an ordinary loss to the extent of the property's adjusted basis on the date of abandonment.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following expenses or losses could create a net operating loss for an individual taxpayer?

Accepted Answer

A) large losses on sales of investment assets 
B) an operating loss from a sole proprietorship 
C) large charitable contributions 
D) all of the above

Question 9

For purposes of the application of the passive loss limitations,a closely held C corporation is a C corporation in which more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

Accepted Answer

A) True 
 B)False

Question 10

The total worthlessness of a security generally results in an ordinary loss.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is not generally classified as a passive activity?

Accepted Answer

A) an activity in which the taxpayer does not materially participate 
B) a limited partnership interest 
C) rental real estate 
D) a business in which the taxpayer owns an interest and works 1,000 hours a year

Question 12

Tom and Shawn own all of the outstanding stock of Brady Corporation (a retail store operated as a C corporation).This year,Brady generates taxable income of $20,000 from active business operations,and also reports investment interest income of $22,000 and losses of $28,000 from a passive activity.As a result,Brady Corporation reports

Accepted Answer

A) net income of $42,000. 
B) interest income of $22,000 and a passive loss carryover of $8,000. 
C) business income of $20,000 and a passive loss carryover of $6,000. 
D) business income of $20,000,interest income of $22,000,and a passive loss carryover of $28,000.

Question 13

Securities held by a taxpayer became worthless during the year.The taxpayer plans to take a deduction for the loss.He will claim the deduction on page 1 of his Form 1040.

Accepted Answer

A) True 
 B)False

Question 14

All of the following losses are deductible except

Accepted Answer

A) decline in value of securities. 
B) total worthlessness of securities. 
C) abandonment of business property. 
D) a net operating loss.

Question 15

Lena owns a restaurant which was damaged by a tornado.The following assets were partially destroyed: $$\begin{array} { | l | r | r | r | } 
\hline &  { \text { Basis } } & \text { Reduction in FMV } & \text { Insurance Payment } \
\hline \text { Building } & \$ 150,000 & \$ 200,000 & \$ 100,000 \
\hline \text { Equipment } & \$ 30,000 & \$ 20,000 & \$ 10,000 \
\hline
\end{array}$$ Lena has AGI of $50,000.What is the amount of Lena's deductible casualty loss?

Accepted Answer

A) $54,900 
B) $60,000 
C) $70,000 
D) $180,000

Question 16

Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

Accepted Answer

A) True 
 B)False

Question 17

A taxpayer can deduct a casualty loss on a personal asset destroyed in a car accident,but only to the extent the taxpayer has personal casualty gains for the year.

Accepted Answer

A) True 
 B)False

Question 18

The sale of inventory at a loss results in an ordinary loss.

Accepted Answer

A) True 
 B)False

Question 19

A taxpayer may deduct a loss resulting from the theft of business and investment property but not a theft of personal-use property.

Accepted Answer

A) True 
 B)False

Question 20

A business bad debt gives rise to an ordinary deduction while a nonbusiness bad debt is treated as a short-term capital loss.

Accepted Answer

A) True 
 B)False

Exam 25: Losses and Bad Debts

One of the requirements which must be met for stock to be considered Section 1244 stock is that the stock must be owned by an individual or a partnership.

A taxpayer uses an allowance method (i.e.,aging method)of calculating bad debt expense for purposes of the business' financial statements.For income tax purposes,she will also use the allowance method to calculate the bad debt deduction.

Which of the following is most likely not considered a casualty?

Jamie sells investment real estate for $80,000,resulting in a $15,000 loss.Jamie's loss is

Martha,an accrual method taxpayer,has an accounting practice.In 2018,she performs tax analyses for Arnold and sends him an invoice for $10,000.In 2019,Martha sells her practice and all accounts to David.Arnold's debt becomes worthless that year after David has purchased the practice.The result is

A loss on business or investment property which is abandoned is deductible as an ordinary loss to the extent of the property's adjusted basis on the date of abandonment.

Which of the following expenses or losses could create a net operating loss for an individual taxpayer?

For purposes of the application of the passive loss limitations,a closely held C corporation is a C corporation in which more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

The total worthlessness of a security generally results in an ordinary loss.

Which of the following is not generally classified as a passive activity?

Securities held by a taxpayer became worthless during the year.The taxpayer plans to take a deduction for the loss.He will claim the deduction on page 1 of his Form 1040.

All of the following losses are deductible except

Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

A taxpayer can deduct a casualty loss on a personal asset destroyed in a car accident,but only to the extent the taxpayer has personal casualty gains for the year.

The sale of inventory at a loss results in an ordinary loss.

A taxpayer may deduct a loss resulting from the theft of business and investment property but not a theft of personal-use property.

A business bad debt gives rise to an ordinary deduction while a nonbusiness bad debt is treated as a short-term capital loss.