7 CHAPTER DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES
Instructor: The test items in both the print Test Bank and ExamView test-creation software are numbered by question type within each chapter. Thus, users of ExamView can more easily preview their selections using the printed Test Bank in the same numbering system. Learning Objective, Level of Difficulty, Estimated Time to Completion, and the AACSBs and AICPAs Core Competencies for each test item are located within the item itself. Question/ Problem Status: Present Edition Q/P in Prior Edition
Topic TRUE OR FALSE
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Bad debt: loss amount Bad debts Bad debts: tax benefit rule Reserve method Bad debt: collection Proof of worthlessness Nonbusiness bad debt Nonbusiness bad debt versus business bad debt Nonbusiness bad debt: corporation Business bad debt: classification Nonbusiness bad debt Bona fide debt Worthless security versus business loan Worthless securities Worthless securities Definition of 1244 small business stock Loss on 1244 small business stock Gain and loss on 1244 small business stock Rental loss Casualty loss: defined Casualty loss: taxpayer Casualty loss: defined Theft loss: amount Theft loss: time of deduction Casualty loss: reimbursement Casualty loss: amount of deduction Casualty loss: amount of deduction Casualty loss: disaster area Casualty loss: amount of deduction 7-1
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2010 Annual Edition/Test Bank Status: Present Edition Modified Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged Q/P in Prior Edition 30 31 32 33 34 36 37 39 40 41 42 43 44 45 47 48 49 50
Question/ Problem 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Topic Casualty loss: personal use property Casualty loss: no insurance claim filed Casualty loss: classification Casualty loss: 10% adjusted gross income floor Theft loss: classification Research and experimental expenditures Research and experimental expenditures Research and experimental expenditures Domestic production activities deduction: calculation Domestic production activities deduction: carryover Domestic production activities deduction: W-2 wage limit Net operating loss: defined Net operating loss: carryback period Net operating loss: farming Net operating loss: farming Net operating loss: nonbusiness income Net operating loss: theft of securities Net operating loss: computation Net operating loss: computation Net operating loss: computation Net operating loss: classification MULTIPLE CHOICE
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Bad debts Bad debts: cash basis taxpayer Business bad debt Business bad debt Bad debts: purchased debt instrument Bad debts: specific charge-off method and tax benefit rule Bad debts: related parties Bad debts: related parties Loss on worthless securities: 1244 stock Loss on worthless securities: 1244 stock Loss on 1244 small business stock: negative AGI Loss on 1244 small business stock: worthless securities Loss on 1244 small business stock: individual shareholder Casualty loss: definition Casualty loss: personal use property Casualty loss: personal use property Casualty loss: personal use property and insurance
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Deductions and Losses: Certain Business Expenses and Losses Status: Present Edition Modified Unchanged Modified Unchanged Unchanged Modified Unchanged Unchanged Modified Modified Unchanged Unchanged Unchanged Unchanged Unchanged Modified New Unchanged Unchanged Modified Unchanged Unchanged Unchanged Unchanged Unchanged Modified
7-3 Q/P in Prior Edition 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 35 36 37 38 39 40 41 42 43
Question/ Problem 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43
Topic Casualty loss: personal use property Casualty loss: personal use property Casualty loss: personal use property Casualty loss: business and personal use property Casualty loss: investment and personal use property Casualty loss: personal and business use auto Casualty loss: insurance recovery Casualty loss: business use property Casualty loss: production of income property and personal use property Research and experimental expenditures Research and experimental expenditures Research and experimental expenditures Domestic production activities deduction: calculation Domestic production activities deduction: W-2 wage limit Domestic production activities deduction: effect of NOL carryforward Net operating loss: adjustments Net operating loss: carryback and carryover periods Net operating loss: adjustments Net operating loss: calculation Net operating loss: calculation Net operating loss: calculation Net operating loss: calculation Net operating loss: calculation Net operating loss: adjustments Net operating loss: adjustments Net operating loss: adjustments PROBLEMS
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Nonbusiness bad debt and tax benefit rule Nonbusiness bad debt, 1244 stock, casualty gain, and worthless securities Nonbusiness bad debt, casualty gain, and casualty loss Casualty loss: personal use property and investment property Casualty gains and losses Theft loss Casualty gains and losses Research and experimental expenditures Domestic production activities deduction Net operating loss: calculation Net operating loss: calculation Net operating loss: calculation
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2010 Annual Edition/Test Bank
Question/ Problem
Topic ESSAY
Status: Present Edition
Q/P in Prior Edition
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Classification as bona fide loan versus a gift Casualty loss: disaster area loss Casualty loss: property associated with a transaction entered into for profit Research and experimental expenditures Domestic production activities deduction: statutory purpose Domestic production activities deduction: calculation of QPAI Net operating loss: definition Net operating loss: nonbusiness deductions Net operation loss: calculation of remaining NOL
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Deductions and Losses: Certain Business Expenses and Losses
TRUE/FALSE 1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $13,000 in final settlement of the account. James can take a $7,000 bad debt deduction in the current year. ANS: F James has a basis of $15,000 in the account receivable and hence, his bad debt is limited to $2,000 ($13,000 $15,000). PTS: 1 OBJ: 1 MSC: 5 min DIF: 1 REF: p. 7-3 | p. 7-4 NAT: AICPA FN-Measurement | AACSB Analytic
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2. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year. ANS: T OBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-4 NAT: AICPA FN-Measurement | AACSB Analytic
3. Last year, taxpayer had a $10,000 nonbusiness loan that was written off and netted against a $5,000 shortterm capital gain. Last year, taxpayer also had an NOL which taxpayer carried back two years and used in its entirety. If taxpayer collects the entire $10,000 during the current year, only $5,000 needs to be included in gross income. ANS: T The taxpayer must include the nonbusiness loan previously written off as income in the current year to the extent the deduction yielded a tax benefit in the year of the deduction. PTS: 1 DIF: 1 REF: p. 7-5 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 5 min
4. Accrual basis taxpayers can use the reserve method for computing deductions for bad debts. ANS: F Taxpayers can use only the specific charge-off method in accounting for bad debts. The reserve method is not permitted. PTS: 1 DIF: 1 REF: p. 7-4 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 2 min
5. If an account receivable written off during the current year is subsequently collected during the current year, the write-off entry is reversed. ANS: T OBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-5 NAT: AICPA FN-Reporting | AACSB Analytic
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2010 Annual Edition/Test Bank
6. Bankruptcy is generally an indication that a debt is worthless. ANS: T OBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-4 NAT: AICPA FN-Reporting | AACSB Analytic
7. A nonbusiness bad debt is a debt unrelated to the taxpayers trade or business either when it was created or when it became worthless. ANS: T OBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-5 NAT: AICPA FN-Reporting | AACSB Analytic
8. In determining whether a debt is a business or nonbusiness bad debt, the debtors use of the borrowed funds is not important. ANS: T The use of the funds by the debtor is of no consequence in making the determination. The determination is made at the creditor level. PTS: 1 DIF: 1 REF: p. 7-5 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 2 min
9. A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction. ANS: F The nonbusiness bad debt provisions do not apply to corporations. PTS: 1 DIF: 1 REF: p. 7-6 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 2 min
10. A business bad debt can offset an unlimited amount of capital gain with any excess nonbusiness bad debt then offsetting ordinary income. ANS: F A business bad debt is classified as an ordinary deduction. PTS: 1 DIF: 1 REF: p. 7-5 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 2 min
11. The amount of complete worthlessness on a nonbusiness bad debt is deducted at final settlement. ANS: T A taxpayer is entitled to deduct the net amount of the loss upon final settlement of the debt. PTS: 1 DIF: 1 REF: p. 7-4 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 2 min
Deductions and Losses: Certain Business Expenses and Losses
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12. A bona fide debt arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed sum of money. ANS: T OBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-6 NAT: AICPA FN-Reporting | AACSB Analytic
13. A nonsecured business loan that is uncollectible will be treated as a worthless security and hence, produce a capital loss. ANS: F A nonsecured business loan is not a security and hence, will produce an ordinary loss. PTS: 1 OBJ: 1 | 2 MSC: 2 min DIF: 1 REF: p. 7-3 | p. 7-6 NAT: AICPA FN-Reporting | AACSB Analytic
14. A loss from a worthless security is always treated as a long-term capital loss. ANS: F The last day treatment increases the likelihood that the capital loss will be classified as long term, but is not automatic. PTS: 1 DIF: 1 REF: p. 7-6 NAT: AICPA FN-Reporting | AACSB Analytic 15. A loss is allowed for a security that declines in value. ANS: F A loss is allowed for securities that become completely worthless during the tax year. PTS: 1 DIF: 1 REF: p. 7-6 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 2 MSC: 2 min OBJ: 2 MSC: 2 min
16. Several years ago, John purchased 2,000 shares of 1244 stock from Red Corporation for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, Mike sold the Red Corporation stock for $3,000. Mike has a $9,000 ($3,000 $12,000) ordinary loss for the current year. ANS: F Mike did not buy the stock from Red Corporation, and therefore, it is not 1244 stock to him. Mike has a $9,000 capital loss. PTS: 1 DIF: 1 REF: p. 7-6 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 2 MSC: 2 min
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2010 Annual Edition/Test Bank
17. Taxpayers must sell or exchange their 1244 stock in order to recognize an ordinary loss (does not apply to stock becoming worthless). ANS: F Section 1244 loss treatment also applies to 1244 stock becoming worthless. PTS: 1 DIF: 1 REF: p. 7-6 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 2 MSC: 2 min
18. Al, who is single, has a gain of $30,000 on the sale of 1244 stock (small business stock) and a loss of $60,000 on the sale of 1244 stock. As a result, Al has a $20,000 net capital gain and a $50,000 ordinary loss. ANS: T The $30,000 gain on the sale of the 1244 stock is classified as a capital gain. The $60,000 loss on the sale of the 1244 stock is classified as an ordinary loss to the extent of $50,000. The balance of the 1244 stock loss of $10,000 is classified as a capital loss. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 7-6 | p. 7-7 NAT: AICPA FN-Measurement | AACSB Analytic
19. An individual may deduct a loss on rental property only if it meets the definition of a casualty loss. ANS: F Only an individuals loss on personal use property must meet the definition of a casualty to be deductible. PTS: 1 DIF: 1 REF: p. 7-8 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 3 | 4 MSC: 2 min
20. Other casualty means casualties similar to those associated with fires, storms, or shipwrecks. ANS: T OBJ: 3 | 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-8 NAT: AICPA FN-Reporting | AACSB Analytic
21. A father cannot claim a casualty on his daughters personal use property. ANS: T OBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-8 NAT: AICPA FN-Reporting | AACSB Analytic
22. A casualty loss deduction is not allowed for losses resulting from a decline in value rather than an actual loss of property. ANS: T OBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-9 NAT: AICPA FN-Reporting | AACSB Analytic
Deductions and Losses: Certain Business Expenses and Losses
23. If the amount of the insurance recovery for a theft of business property is greater than the assets fair market value but less than its adjusted basis, a loss is recognized. ANS: T Loss is recognized if the amount of the insurance recovery is less than the assets adjusted basis. PTS: 1 OBJ: 4 MSC: 2 min DIF: 1 REF: p. 7-10 | p. 7-11 NAT: AICPA FN-Reporting | AACSB Analytic
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24. A theft loss is taken in the year of discovery of the theft. ANS: T OBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-9 NAT: AICPA FN-Reporting | AACSB Analytic
25. If a taxpayer receives reimbursement for a casualty loss sustained and deducted in a previous year, the total reimbursement must be included in gross income on the return for the year in which the reimbursement is received. ANS: F The reimbursement need only be included to the extent the previous deduction resulted in a tax benefit. PTS: 1 DIF: 1 REF: p. 7-9 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 4 MSC: 2 min
26. If rental property is completely destroyed, the amount of the loss is the adjusted basis of the property at the time of the destruction reduced by $500 (in 2009) and 10% of AGI. ANS: F The amount of the loss is not subject to the $500 and 10%-of-AGI limitations. PTS: 1 DIF: 1 REF: p. 7-10 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min
27. The cost of repairs to damaged property may be acceptable as a measure of the loss in value of the property. ANS: T OBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-11 NAT: AICPA FN-Measurement | AACSB Analytic
28. Taxpayers home was destroyed by a storm in the current year and the area was declared a disaster area. If the taxpayer elects to treat the loss as having occurred in the prior year, it will still be subject to the 10%-of-AGI reduction based on the AGI of the current year. ANS: F The taxpayer will use the AGI of the prior year for determining the limitation. PTS: 1 DIF: 1 REF: p. 7-12 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min
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2010 Annual Edition/Test Bank
29. The amount of loss for partial destruction of business property is the lesser of the adjusted basis or the decline in fair market value. ANS: T OBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-10 | p. 7-11 NAT: AICPA FN-Measurement | AACSB Analytic
30. If personal casualty losses (after deducting the $500 floor) exceed personal casualty gains in 2009, the itemized deduction is always equal to the losses, to the extent they exceed 10% of adjusted gross income. ANS: F The losses are subject to the 10% of adjusted gross income floor only to the extent they exceed the gains. PTS: 1 OBJ: 4 MSC: 2 min DIF: 1 REF: p. 7-14 | p. 7-15 NAT: AICPA FN-Measurement | AACSB Analytic
31. The amount of a casualty loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer. ANS: T OBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-11 NAT: AICPA FN-Reporting | AACSB Analytic
32. Losses on rental property are classified as deductions for AGI. ANS: T OBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-13 NAT: AICPA FN-Reporting | AACSB Analytic
33. 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 second year. ANS: T OBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-12 NAT: AICPA FN-Measurement | AACSB Analytic
34. A theft loss of investment property is a miscellaneous itemized deduction subject to the 2%-of-AGI floor. ANS: F A theft loss is a separately stated item on Schedule A of Form 1040. It is not subject to the 2%-of-AGI floor. PTS: 1 DIF: 1 REF: p. 7-13 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 4 MSC: 2 min
35. Research and experimental expenditures do not include expenditures for ordinary testing of materials for quality control. ANS: T OBJ: 5 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-15 | p. 7-16 NAT: AICPA FN-Reporting | AACSB Analytic
Deductions and Losses: Certain Business Expenses and Losses
36. Expenses in connection with the acquisition of land are not research and experimental expenditures. ANS: T OBJ: 5 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-16 NAT: AICPA FN-Reporting | AACSB Analytic
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37. If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project. ANS: F The amortization period is not less than 60 months. PTS: 1 DIF: 1 REF: p. 7-16 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 5 MSC: 2 min
38. For tax years beginning in 2009, the domestic production activities deduction (DPAD) for a sole proprietor is calculated by multiplying 6% times the lesser of (1) qualified production activities income (QPAI) or (2) taxable income or alternative minimum taxable income. ANS: F For a sole proprietor, modified adjusted gross income is used for the DPAD calculation instead of taxable income or alternative minimum taxable income. PTS: 1 DIF: 1 REF: p. 7-17 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 5 min
39. If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction in 2009 because of the taxable income limitation, the product of the amount not allowed multiplied by 6% can be carried over for 5 years. ANS: F In this case, any amount not allowed is lost forever. PTS: 1 DIF: 1 REF: p. 7-18 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 6 MSC: 5 min
40. The domestic production activities deduction (DPAD) for 2009 cannot exceed 50% of all W-2 wages paid by the taxpayer during the tax year. ANS: F Only wages paid to employees engaged in qualified domestic production activities can be used for the 50% limit. PTS: 1 DIF: 1 REF: p. 7-18 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 2 min
41. A theft or other casualty of personal use property can create an NOL for an individual. ANS: T OBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-20 NAT: AICPA FN-Measurement | AACSB Analytic
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2010 Annual Edition/Test Bank
42. A taxpayer must carry any NOL incurred back two years. ANS: F A taxpayer may elect to forgo the carryback period. PTS: 1 DIF: 1 REF: p. 7-21 NAT: AICPA FN-Reporting | AACSB Analytic 43. A farming NOL may be carried back 5 years. ANS: T OBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-20 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 7 MSC: 2 min
44. The amount of a farming loss cannot exceed the amount of the taxpayers NOL for the taxable year. ANS: T OBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-20 NAT: AICPA FN-Measurement | AACSB Analytic
45. Nonbusiness income for net operating loss purposes includes such items as dividends and interest income. ANS: T OBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-22 NAT: AICPA FN-Reporting | AACSB Analytic
46. A theft of a security can create or increase a net operating loss for an individual. ANS: T OBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-20 NAT: AICPA FN-Measurement | AACSB Analytic
47. An NOL carryforward is used in determining the current years NOL. ANS: F An NOL carryforward is not used in determining the current years NOL. PTS: 1 DIF: 1 REF: p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 7 MSC: 2 min
48. The excess of nonbusiness capital losses over nonbusiness capital gains must be added to taxable income to compute the net operating loss of an individual. ANS: T OBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-22 NAT: AICPA FN-Reporting | AACSB Analytic
Deductions and Losses: Certain Business Expenses and Losses
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49. An individual taxpayer who does not itemize deductions uses the standard deduction to compute the excess of nonbusiness deductions over the sum of nonbusiness income and net nonbusiness capital gains for purposes of computing net operating loss. ANS: T OBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
50. When a net operating loss is carried back to a non-loss year, the net operating loss is a miscellaneous itemized deduction. ANS: F An NOL is a business loss. Therefore, the deduction is a deduction for AGI. PTS: 1 DIF: 1 REF: p. 7-24 NAT: AICPA FN-Reporting | AACSB Analytic MULTIPLE CHOICE 1. Mable is in the business of factoring accounts receivable. Last year, she purchased a $20,000 account receivable for $15,000. This year, the account was settled for $18,000. How much loss can Mable deduct and in which year? a. $2,000 for the current year. b. $2,000 for the prior year and $3,000 for the current year. c. $3,000 for the current year. d. $5,000 for the current year. e. None of the above. ANS: E Mables basis in the debt is $15,000. Therefore, her gain for the current year is $3,000 ($18,000 $15,000). PTS: 1 DIF: 1 REF: p. 7-3 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 5 min OBJ: 7 MSC: 2 min
2. Jed is an electrician. Jed and his wife are cash basis taxpayers and file a joint return. Jed wired a new house for Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to be exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement. Jed was never able to collect the judgement nor the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year? a. $0. b. $2,000. c. $3,000. d. $5,000. e. None of the above. ANS: A Jed is a cash basis taxpayer and therefore, has no basis in the $5,000 not collected. PTS: 1 DIF: 1 REF: p. 7-3 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 5 min
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2010 Annual Edition/Test Bank
3. On June 2, 2008, Freds TV Sales sold Mark a large HD TV, on account, for $12,000. Freds TV Sales uses the accrual method. In 2009, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could expect to receive 60 cents on the dollar of the amount owed to him. In 2010, final settlement was made and Fred received $5,000. How much bad debt loss can Fred deduct and in which years? a. 2008$12,000. b. 2008$0; 2009$8,000. c. 2008$0; 2009$3,200; 2010$0. d. 2009$4,800. e. None of the above. ANS: C This debt is a business debt. Therefore, partial worthlessness can be recognized in 2009. The loss in 2009 would be $3,200 (.40 $8,000). In 2010, the account has been written down to $4,800 ($8,000 $3,200) and hence, the collection of $5,000 would produce a $200 ($5,000 $4,800) gain rather than a loss. PTS: 1 DIF: 1 REF: p. 7-3 to 7-5 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 5 min
4. Red Corporation incurred a $12,000 bad debt last year. Red Corporation also had an $8,000 long-term capital gain last year. Reds taxable income for last year was $28,000. During the current year, Red Corporation, unexpectedly, collected $5,000 on the debt. How should Red Corporation account for the $5,000 collection? a. $0 income. b. $3,000 income. c. $4,000 income. d. $5,000 income. e. None of the above. ANS: D This is a business bad debt and therefore, the whole $12,000 was written off as an ordinary loss. The collection of $5,000 represents $5,000 of income under the tax benefit rule. PTS: 1 OBJ: 1 MSC: 5 min DIF: 1 REF: p. 7-4 | p. 7-5 NAT: AICPA FN-Measurement | AACSB Analytic
5. Last year, Lucy purchased a $100,000 account receivable for $80,000. During the current year, Lucy collected $85,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? a. $0. b. $5,000 gain. c. $10,000 loss. d. $15,000 loss. e. None of the above. ANS: B The amount collected is $5,000 ($85,000 $80,000) in excess of Lucys basis in the receivable. PTS: 1 DIF: 1 REF: p. 7-3 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 5 min
Deductions and Losses: Certain Business Expenses and Losses
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6. Two years ago, Gina loaned Tom $50,000. Tom signed a note the terms of which called for monthly payments of $2,000 plus 6% interest on the outstanding balance. Last year, when the balance owing on the loan was $18,000, Tom defaulted on the note. As of the end of last year, there appeared to be no reasonable prospect of Gina recovering the $18,000. As a consequence, Gina claimed the $18,000 as a nonbusiness bad debt. Last year, Gina had AGI of $60,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends. Gina did not itemize her deductions. During the current year, Tom paid Gina $13,000 in final settlement of the loan. How should Gina account for the payment in the current year? a. File an amended tax return for last year. b. Report no income for the current year. c. Report $8,000 of income for the current year. d. Report $12,000 of income for the current year. e. Report $13,000 of income for the current year. ANS: C Income should be reported based on the tax benefit rule. The tax benefit was $8,000 ($5,000 offsets capital gains and $3,000 offsets ordinary income). PTS: 1 DIF: 2 REF: p. 7-5 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 10 min
7. 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 a cash basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is: a. No deduction. b. $3,000 deduction. c. $20,000 deduction. d. $21,800 deduction. e. None of the above. ANS: B This is a bona fide loan to his son; therefore, Tom is entitled to a bad debt of $20,000. The deduction for the current year is limited to $3,000, since the bad debt is classified as a short-term capital loss. No deduction is allowed for the $1,800 of accrued interest receivable because Tom is a cash basis taxpayer. PTS: 1 DIF: 1 REF: p. 7-4 to 7-6 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 5 min
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2010 Annual Edition/Test Bank
8. 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, Hanks Auto. As partial payment for the car, the dealer accepted the note from Sharons sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharons sister died. Hanks 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 Hanks Auto may claim on the current year tax return? a. $0. b. $3,000. c. $15,500. d. $18,000. e. None of the above. ANS: C This is a business bad debt for Hanks Auto and therefore, the loss is $15,500. PTS: 1 DIF: 1 REF: p. 7-3 to 7-5 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 5 min
9. On September 3, 2008, Able purchased 1244 stock in Red Corporation for $6,000. On December 31, 2008, the stock was worth $8,500. On August 15, 2009, Able was notified that the stock was worthless. How should Able report this item on his 2008 and 2009 tax returns? a. 2008$0; 2009$6,000 ordinary loss. b. 2008$0; 2009$6,000 long-term capital loss. c. 2008$2,500 short-term capital loss; 2009$8,500 short-term capital loss. d. 2008$2,500 short-term capital gain; 2009$3,800 ordinary loss. e. None of the above. ANS: A The loss cannot be recognized until the year the stock is completely worthless. That year is 2009 for Able. The loss is treated as having occurred on the last day of that tax year. Hence, the $6,000 loss would be a long-term capital loss in 2009, except the stock is 1244 stock. So in 2009, there is a $6,000 ordinary loss. PTS: 1 DIF: 1 REF: p. 7-6 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 5 min
10. On February 20, 2008, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2009, the stock became worthless. During 2009, 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 2009 tax return? a. $4,000 long-term capital loss and $9,000 short-term capital loss. b. $4,000 long-term capital loss and $3,000 short-term capital loss. c. $8,000 ordinary loss and $3,000 short-term capital loss. d. $8,000 ordinary loss and $5,000 short-term capital loss. e. $8,000 long-term capital loss and $6,000 short-term capital loss.
Deductions and Losses: Certain Business Expenses and Losses
ANS: C Ordinary loss (small business stock) Long-term capital gain Less long-term capital loss (worthless securities) Net long-term capital gain Less short-term capital loss (nonbusiness bad debt) Net short-term capital loss Short-term capital loss limited to PTS: 1 DIF: 2 REF: p. 7-4 to 7-7 NAT: AICPA FN-Measurement | AACSB Analytic $5,000 (1,000) $4,000 (9,000) ($5,000) ($3,000) OBJ: 1 | 2 MSC: 10 min
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($8,000)
11. John files a return as a single taxpayer. In 2009, he had the following items: Salary of $40,000. Loss of $65,000 on the sale of 1244 stock acquired two years ago. Interest income of $8,000. Determine Johns AGI for 2009. a. ($5,000). b. $0. c. $45,000. d. $48,000. e. None of the above. ANS: E Salary Interest income Ordinary loss ( 1244 ordinary loss) Long-term capital loss (limited to $0)* AGI $40,000 8,000 (50,000) 0 ($ 2,000)
*$15,000 ($65,000 $50,000) is long-term capital loss. Of this amount, no amount can be used because there is no ordinary income. $15,000 ($15,000 $0) will be carried forward. PTS: 1 DIF: 1 REF: p. 7-4 to 7-7 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 5 min
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2010 Annual Edition/Test Bank
12. Bruce, who is single, had the following items for the current year: Salary of $90,000. Gain of $30,000 on the sale of 1244 stock acquired two years earlier. Loss of $75,000 on the sale of 1244 stock acquired three years earlier. Worthless stock of $7,000. The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year.
Determine Bruces AGI for the current year. a. $37,000. b. $38,000. c. $42,000. d. $47,000. e. None of the above. ANS: B Salary 1244 ordinary loss Long-term capital gain Long-term capital loss Excess 1244 loss ($75,000 $50,000) Worthless security Net long-term capital loss (limited to $3,000) Adjusted gross income PTS: 1 OBJ: 2 MSC: 10 min $90,000 (50,000) $30,000 $25,000 7,000 (32,000) (2,000) $38,000
DIF: 2 REF: p. 7-6 | p. 7-7 NAT: AICPA FN-Measurement | AACSB Analytic
13. On July 20, 2007, 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, 2008, Matt purchased an additional 1,000 shares of Orange Corporation stock for $150,000. On September 15, 2009, Matt sold the 4,000 shares of stock for $80,000. How should Matt treat the sale of the stock on his 2009 return? a. $94,000 ordinary loss. b. $100,000 ordinary loss; $6,000 net capital gain. c. $100,000 ordinary loss; $30,000 STCL. d. $130,000 ordinary loss; $36,000 LTCG. e. None of the above.
Deductions and Losses: Certain Business Expenses and Losses
ANS: B Amount realized (1,000 shares $20 per share) Less: basis Recognized loss 1244 ordinary loss STCL
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$ 20,000 (150,000) ($130,000) ($100,000) ($ 30,000)
$ 60,000 Amount realized (3,000 shares $20 per share) Less: basis (24,000) Recognized gain (LTCG) $ 36,000 Hence, Matt has a $100,000 ordinary loss and a $6,000 net capital gain ($36,000 LTCG $30,000 STCL). PTS: 1 DIF: 2 REF: p. 7-7 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 10 min
14. Which of the following events would produce a deductible loss? a. Erosion of personal use land due to rain or wind. b. Termite infestation of a personal residence over a several year period. c. Damages to personal automobile resulting from a taxpayers willful negligence. d. A misplaced diamond ring. e. None of the above. ANS: E None of these events satisfy the definition of a casualty or theft. PTS: 1 OBJ: 3 MSC: 5 min DIF: 1 REF: p. 7-8 | p. 7-9 NAT: AICPA FN-Reporting | AACSB Analytic
15. In 2009, Rick had the following insured personal casualty losses (arising from one casualty). Rick also had $18,000 AGI for the year. Asset A B C Adjusted Basis $1,200 3,000 700 Fair Market Value Before After $1,100 $300 2,000 -0900 -0Insurance Recovery $100 500 200
Ricks casualty loss deduction is: a. $400. b. $600. c. $1,000. d. $1,400. e. None of the above.
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ANS: A Asset A Asset B Asset C
2010 Annual Edition/Test Bank
Less: Statutory floor Less: AGI limitation (10% $18,000) Casualty loss deduction PTS: 1 OBJ: 4 MSC: 10 min DIF: 2 REF: p. 7-10 to 7-13 NAT: AICPA FN-Measurement | AACSB Analytic
$ 700 1,500 500 $2,700 (500) (1,800) $ 400
16. Jim had a car accident in 2009 in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for personal use. Jim received an insurance recovery of 80% of the value of the car at the time of the accident. If Jims AGI for the year is $50,000, determine his deductible loss on the car. a. $500. b. $6,000. c. $10,500. d. $30,000. e. None of the above. ANS: A The car is used for personal use and hence, the amount of the loss is $30,000 (FMV) reduced by the insurance recovery ($24,000). The $6,000 loss is subject to the $500 floor per event and the 10%-of-AGI limitations. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 7-11 | p. 7-13 NAT: AICPA FN-Measurement | AACSB Analytic
17. Norms car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2009. The cars adjusted basis at the time of the accident was $13,000. Its fair market value was $11,500. The car was covered by a $2,000 deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates. His adjusted gross income was $14,000 (before considering the loss). What is Norms deductible loss? a. $0. b. $100. c. $500. d. $9,500. e. None of the above.
Deductions and Losses: Certain Business Expenses and Losses
ANS: A Amount (lesser of adjusted basis or FMV decline) Less: Insurance recovery as if the claim had been filed Statutory floor AGI limitation (10% $14,000) Deductible loss However, no deduction is permitted because a timely insurance claim was not filed. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 7-10 to 7-13 NAT: AICPA FN-Measurement | AACSB Analytic
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$11,500 (9,500) (500) (1,400) $ 100
18. In 2009, Grants personal residence was damaged by fire. Grant was insured for 90% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows: Cost basis Value before casualty Value after casualty What is Grants allowable casualty loss deduction? a. $0. b. $6,500. c. $6,900. d. $10,000. e. $80,000. ANS: B The proceeds received are $90,000 [($250,000 $150,000) 90%]. Loss ($100,000 $90,000) Less: $500 floor 10% AGI (10% $30,000) Casualty loss deduction PTS: 1 OBJ: 4 MSC: 10 min DIF: 1 REF: p. 7-10 to 7-13 NAT: AICPA FN-Measurement | AACSB Analytic $10,000 (500) (3,000) $ 6,500 $170,000 250,000 150,000
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2010 Annual Edition/Test Bank
19. John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows: Cost basis Value before the fire Value after the fire Insurance recovery $250,000 400,000 100,000 270,000
John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows: Cost basis Value before the accident Value after the accident Insurance recovery What is Johns deductible casualty loss? a. $0. b. $15,800. c. $15,900. d. $35,900. e. None of the above. ANS: A Gain on home ($270,000 $250,000) Loss on car Total gain $20,000 (0) $20,000 $80,000 6,000 20,000 0
No casualty loss can be recognized on the car since John was cited with reckless driving and willful negligence. PTS: 1 OBJ: 4 MSC: 10 min DIF: 1 REF: p. 7-8 to 7-14 NAT: AICPA FN-Measurement | AACSB Analytic
20. In 2009, Ned and Mary had the following items: Salary Personal use casualty gain Personal use casualty loss (after floor) $500 Other itemized deductions $40,000 10,000 17,000 4,000
Assuming that Ned and Mary file a joint return, determine their taxable income for the current year. a. $21,300. b. $26,000. c. $27,200. d. $30,200. e. None of the above.
Deductions and Losses: Certain Business Expenses and Losses
ANS: A Salary Personal use casualty gains in excess of personal use casualty losses ($10,000 $10,000) Adjusted gross income Less: Deductions Itemized deductions Casualty loss ($17,000 $10,000) AGI floor (10% $40,000) Deductible casualty loss Other itemized deductions Total itemized deductions Standard deduction (larger than itemized deductions) Personal exemption ($3,650 2) Taxable income PTS: 1 OBJ: 4 MSC: 10 min
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$40,000 0 $40,000 $7,000 (4,000) $3,000 4,000 $7,000 (11,400) (7,300) $21,300
DIF: 2 REF: p. 7-10 to 7-15 NAT: AICPA FN-Measurement | AACSB Analytic
21. In 2009, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: Loss from damage to rental property Loss from theft of bonds Personal casualty gain Personal casualty loss (after $500 floor) Determine the amount of Morleys itemized deduction from the losses. a. $0. b. $2,900. c. $5,120. d. $5,600. e. None of the above. ANS: D AGI before casualties Rental property loss Personal casualty gain Personal casualty loss Adjusted gross income Itemized deductions Casualty loss [($9,000 $4,000) (10% $24,000)] Miscellaneous itemized deductions Total itemized deductions $30,000 (6,000) $4,000 (4,000) 0 $24,000 ($6,000) (3,000) 4,000 (9,000)
$2,600 3,000 $ 5,600
The bonds are property held for the production of income, but not attributable to rents or royalties. Therefore, the loss is a miscellaneous itemized deduction not subject to the 2%-of-AGI floor. PTS: 1 OBJ: 4 MSC: 10 min DIF: 2 REF: p. 7-10 to 7-15 NAT: AICPA FN-Measurement | AACSB Analytic
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2010 Annual Edition/Test Bank
22. In 2009, Theo had a salary of $30,000 and experienced the following losses: Loss from damage to rental property Loss from theft of securities Personal casualty gain Personal casualty loss (after $500 floor) Determine the amount of Theos itemized deduction from these losses. a. $0. b. $2,800. c. $2,900. d. $4,580. e. None of the above. ANS: E Salary Rental loss Personal casualty gain Personal casualty loss AGI $30,000 (10,000) $4,000 (3,000) 1,000 $21,000 ($10,000) (5,000) 4,000 (3,000)
The securities are property held for the production of income, but not attributable to rents or royalties. Therefore, the loss is a miscellaneous itemized deduction not subject to the 2%-of-AGI floor. Loss on theft of securities PTS: 1 OBJ: 4 MSC: 10 min DIF: 2 REF: p. 7-13 | p. 7-14 NAT: AICPA FN-Measurement | AACSB Analytic $5,000
23. Alicia was involved in an automobile accident in 2009. Her car was used 50% for business and 50% for personal use. The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If Alicias AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss. a. $2,100. b. $5,700. c. $6,100. d. $16,500. e. None of the above.
Deductions and Losses: Certain Business Expenses and Losses ANS: B
Cost Less: depreciation Basis Fair market value Loss AGI Less: Business loss Modified AGI Personal casualty loss Less: $500 floor 10% of AGI (10% $38,000) Itemized deduction PTS: 1 OBJ: 4 MSC: 15 min DIF: 3 REF: p. 7-10 to 7-14 NAT: AICPA FN-Measurement | AACSB Analytic Business Use $20,000 (8,000) $12,000 $10,000 $12,000 Personal Use $20,000 0 $20,000 $10,000 $10,000 $50,000 (12,000) $38,000 $10,000 (500) (3,800) $ 5,700
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24. Last year, Sarah (who files a joint return) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarahs insurance company told her that her policy did not cover the theft. Sarahs other itemized deductions last year were $4,000. She and her husband had AGI of $30,000 last year. In August of the current year, Sarahs insurance company decided that Sarahs 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. a. None of the $5,000 should be included in gross income. b. $2,900 should be included in gross income. c. $5,000 should be included in gross income. d. Last years return should be amended to include the $5,000. e. None of the above. ANS: A Sarah would have taken the standard deduction ($10,900) last year. Hence, none of the $5,000 should be included in gross income this year because there was no tax benefit from the loss in the prior year. PTS: 1 OBJ: 4 MSC: 5 min DIF: 2 REF: p. 7-10 to 7-14 NAT: AICPA FN-Measurement | AACSB Analytic
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2010 Annual Edition/Test Bank
25. 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. ANS: D Amount of loss (adjusted basis for business property that is completely destroyed) Less: Insurance proceeds received ($75,000 95%) Business loss A business casualty loss is classified as an ordinary loss. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 7-7 to 7-13 NAT: AICPA FN-Measurement | AACSB Analytic $90,000 (71,250) $18,750
26. In 2009, Juans home was burglarized. Juan had the following items stolen: Securities worth $15,000. Juan purchased the securities four years ago for $20,000. New tools which Juan had purchased two weeks earlier for $6,000. Juan uses the tools in making repairs at an apartment house that he owns and manages. An antique worth $12,000. Juan inherited the antique (a family keepsake) when the property was worth $9,000.
Juans homeowners policy had a $50,000 deductible clause for thefts. If Juans salary for the year is $60,000, determine the amount of his itemized deductions as a result of the theft. a. $3,100. b. $6,000. c. $23,100. d. $23,500. e. None of the above. ANS: C Salary Less: Loss on theft of tools AGI Personal use property theft loss Less: $500 floor 10% of AGI (10% $54,000) Deductible loss Loss on securities Total itemized deductions PTS: 1 OBJ: 4 MSC: 10 min DIF: 2 REF: p. 7-10 to 7-13 NAT: AICPA FN-Measurement | AACSB Analytic $60,000 (6,000) $54,000 $ 9,000 (500) (5,400) $ 3,100 20,000 $23,100
Deductions and Losses: Certain Business Expenses and Losses
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27. Regarding research and experimental expenditures, which of the following are not qualified expenditures? a. Costs of improving an existing pilot model. b. Costs to develop a plant process. c. Costs of developing a formula. d. Costs of purchasing a building to be used for research. e. None of the above. ANS: D OBJ: 5 MSC: 5 min PTS: 1 DIF: 1 REF: p. 7-15 | p. 7-16 NAT: AICPA FN-Reporting | AACSB Analytic
28. Blue Corporation incurred the following expenses in connection with the development of a new product: Salaries Utilities Materials Advertising Market survey Depreciation on machine $100,000 18,000 25,000 5,000 3,000 9,000
Blue expects to begin selling the product next year. If Blue elects to expense research and experimental expenditures, determine the amount of the deduction for research and experimental expenditures for the current year. a. $0. b. $118,000. c. $143,000. d. $152,000. e. $160,000. ANS: D A deduction of $152,000 ($100,000 + $18,000 + $25,000 + $9,000) is permitted in the year of incurrence for the research and experimental expenditures. PTS: 1 OBJ: 5 MSC: 5 min DIF: 1 REF: p. 7-15 | p. 7-16 NAT: AICPA FN-Measurement | AACSB Analytic
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2010 Annual Edition/Test Bank
29. Last year, Green Corporation incurred the following expenditures in the development of a new plant process: Salaries Materials Utilities Quality control testing costs Management study costs Depreciation of equipment $200,000 80,000 10,000 30,000 5,000 15,000
During the current year, benefits from the project began being realized in March. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year. a. $50,833. b. $55,833. c. $56,667. d. $61,000. e. None of the above. ANS: A Salary Materials Utilities Depreciation Research and experimental costs Current deduction $50,833 [($305,000 60) 10 months] Neither the quality control testing costs nor the management study costs are research and experimental expenditures. PTS: 1 OBJ: 5 MSC: 10 min DIF: 2 REF: p. 7-15 | p. 7-16 | Example 21 NAT: AICPA FN-Measurement | AACSB Analytic $200,000 80,000 10,000 15,000 $305,000
30. Ivory, Inc., has taxable income of $300,000 and qualified production activities income (QPAI) of $200,000 in 2009. Ivorys domestic production activities deduction is: a. $6,000. b. $9,000. c. $12,000. d. $18,000. e. None of the above.
Deductions and Losses: Certain Business Expenses and Losses
ANS: C DPAD is calculated for Ivory for 2009 as the lesser of the following: $200,000 6% = $12,000 $300,000 6% = $18,000 So the DPAD is $12,000. PTS: 1 DIF: 1 REF: p. 7-17 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 5 min
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31. Amber operates her business as a sole proprietorship during 2009. Her domestic production activities deduction (DPAD) before any effect of the wage expense limitation is $70,000. The total W-2 wages that her sole proprietorship pays for the tax year are $110,000. The wages paid to employees not engaged in qualified domestic production activities are $20,000. Ambers DPAD for 2009 is: a. $0. b. $45,000. c. $55,000. d. $70,000. e. None of the above. ANS: B Ambers DPAD is limited to 50% of the W-2 wages that her sole proprietorship pays to employees engaged in qualified domestic production activities. 50% $90,000 = $45,000 PTS: 1 OBJ: 6 MSC: 5 min DIF: 1 REF: p. 7-17 | p. 7-18 NAT: AICPA FN-Measurement | AACSB Analytic
32. Cream, Inc.s taxable income for 2009 before any deduction for an NOL carryforward of $30,000 is $70,000. Creams qualified production activities income (QPAI) is $60,000. What is the amount of Creams domestic production activities deduction (DPAD) for 2009? a. $1,200. b. $1,800. c. $2,400. d. $3,600. e. None of the above. ANS: C Taxable income for purposes of calculating the DPAD is reduced by any NOL carryforward. Thus, the amount of the DPAD is $2,400 [($70,000 $30,000) 6%]. PTS: 1 OBJ: 6 MSC: 5 min DIF: 1 REF: p. 7-17 | p. 7-18 NAT: AICPA FN-Measurement | AACSB Analytic
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2010 Annual Edition/Test Bank
33. In the computation of a net operating loss, which of the following items is not added to the negative taxable income? a. Losses incurred in a transaction entered into for profit. b. Personal casualty loss. c. Personal theft loss. d. All of the above. e. None of the above. ANS: D OBJ: 7 MSC: 5 min PTS: 1 DIF: 1 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
34. If a taxpayer has an NOL of $20,000, of which $8,000 is attributable to a theft of personal use property, the taxpayer may: a. Carry all of the NOL of $20,000 back 5 years. b. Carry all of the NOL of $20,000 back 3 years. c. Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years. d. All of the above. e. None of the above. ANS: C OBJ: 7 MSC: 5 min PTS: 1 DIF: 1 REF: p. 7-20 NAT: AICPA FN-Reporting | AACSB Analytic
35. Wu, who is single, has the following items for 2009: Salary Itemized deductions ($27,000 attributable to casualty loss) What is Wus NOL for 2009? a. $0. b. $2,000. c. $15,000. d. $25,000. e. None of the above. ANS: B Salary Itemized deductions Personal exemption Taxable income Taxable income Personal exemption Excess of nonbusiness deductions ($32,000 $27,000 = $5,000) over nonbusiness income ($0) NOL PTS: 1 OBJ: 7 MSC: 10 min DIF: 2 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic $25,000 (32,000) (3,650) ($10,650) ($10,650) 3,650 5,000 ($ 2,000) $25,000 (32,000)
Deductions and Losses: Certain Business Expenses and Losses
36. Khalid, who is single, had the following items for 2009: Salary Interest income Loss on theft of securities What is Khalids NOL for 2009? a. $10,000. b. $12,000. c. $15,000. d. $25,100. e. None of the above. ANS: A Salary Interest income AGI Less: Itemized deductions Personal exemption Taxable income Taxable income Personal exemption Net operating loss $40,000 10,000 $50,000 (60,000) (3,650) ($13,650) ($13,650) 3,650 ($10,000) $40,000 10,000 (60,000)
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The loss on theft of securities is treated as attributable to a trade or business. Therefore, it can create an NOL. PTS: 1 OBJ: 7 MSC: 10 min DIF: 2 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
37. Janice, single with one dependent child, had the following items for the year 2009: Salary Dividend income Loss on 1244 small business stock held for three years Total itemized deductions Determine Janices net operating loss for the year 2009. a. $0. b. $5,000. c. $13,350. d. $20,000. e. None of the above. $30,000 10,000 (45,000) (5,000)
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2010 Annual Edition/Test Bank
ANS: C Salary Dividend income Small business stock ordinary loss Adjusted gross income Less: Standard deduction (head of household) Personal and dependency exemptions (2 $3,650) Taxable income Taxable income Excess of nonbusiness deductions over nonbusiness income ($8,350 $10,000) Personal and dependency exemption Net operating loss PTS: 1 OBJ: 2 | 7 MSC: 10 min DIF: 2 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
$30,000 10,000 (45,000) ($ 5,000) (8,350) (7,300) ($20,650) ($20,650) 0 7,300 ($13,350)
38. Bill, age 40, is married with two dependents. Bill had the following items for the year 2009: Bills business loss Bills salary Personal casualty gains Personal casualty loss (after $500 floor) Other itemized deductions ($40,000) 50,000 5,000 (23,000) (15,000)
Based on the above information, what is the net operating loss for Bill and his spouse for the year 2009? a. $0. b. $5,000. c. $7,000. d. $12,000. e. None of the above. ANS: C Business loss Salary Personal casualty gains in excess of casualty losses ($5,000 $5,000) Adjusted gross income Less: Itemized deductions $17,000 Casualty loss [$18,000 (10% $10,000)] Other itemized deductions 15,000 Total itemized deductions Personal and dependency exemptions (4 $3,650) Taxable income Taxable income Nonbusiness deductions in excess of nonbusiness income ($32,000 $17,000) Personal and dependency exemptions Net operating loss ($40,000) 50,000 0 $10,000
(32,000) (14,600) ($36,600) ($36,600) 15,000 14,600 ($ 7,000)
Deductions and Losses: Certain Business Expenses and Losses
PTS: 1 OBJ: 3 | 7 MSC: 10 min DIF: 2 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
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39. Jack, age 30 and married with no dependents, is a self-employed individual. For 2009, his self-employed business sustained a net loss from operations of $10,000. The following additional information was obtained from his personal records for the year: Nonbusiness long-term capital gain Interest income Itemized deductionsconsisting of taxes and interest $ 2,000 6,000 (12,000)
Based on the above information, what is Jacks net operating loss for the current year if he and his spouse file a joint return? a. $2,000. b. $8,000. c. $10,000. d. $11,000. e. $16,400. ANS: C Operating loss Nonbusiness long-term capital gain Interest income Adjusted gross income Less: Itemized deductions Personal exemptions (2 $3,650) Taxable income Taxable income Personal exemptions Excess of nonbusiness deductions over nonbusiness income Itemized deductions Nonbusiness long-term capital gain Interest income Net operating loss PTS: 1 OBJ: 7 MSC: 10 min ($10,000) 2,000 6,000 ($ 2,000) (12,000) (7,300) ($21,300) ($21,300) 7,300 $12,000 (2,000) (6,000)
4,000 ($10,000)
DIF: 2 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
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2010 Annual Edition/Test Bank
40. Mavis, age 70, is single with no dependents. The following information was obtained from her personal records for the current year: Interest income Loss on sale of 1244 stock Itemized deductions Based on the above information, what is Maviss net operating loss for the current year? a. $18,000. b. $19,800. c. $20,000. d. $23,300. e. None of the above. ANS: C Ordinary loss Interest income AGI Less: Standard deduction Additional standard deduction Personal exemption Taxable income Taxable income Add: Personal exemption Excess of nonbusiness deductions over nonbusiness income ($7,100 $7,000) Net operating loss PTS: 1 OBJ: 2 | 7 MSC: 10 min DIF: 2 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic ($20,000) 7,000 ($13,000) (5,700) (1,400) (3,650) ($23,750) ($23,750) 3,650 100 ($20,000) $ 7,000 20,000 4,000
41. Ralph is single and has the following items for the current year: Nonbusiness capital gains Nonbusiness capital losses Interest income Itemized deductions (none of the amount resulted from a casualty loss) $ 9,000 (3,000) 6,000 (10,000)
In calculating Ralphs net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0. b. $2,000. c. $3,000. d. $4,000. e. None of the above.
Deductions and Losses: Certain Business Expenses and Losses
ANS: A $10,000 [$6,000 + ($9,000 $3,000)] = ($2,000). Therefore, nothing is added back. PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
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42. Elizabeth has the following items for the current year: Nonbusiness capital gains Nonbusiness capital losses Interest income Itemized deductions (including a $20,000 casualty loss) $ 5,000 (3,000) 3,000 (27,000)
In calculating Elizabeths net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0. b. $1,000. c. $2,000. d. $20,000. e. None of the above. ANS: C ($27,000 $20,000) [$3,000 + ($5,000 $3,000)] = $2,000. PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
43. Steve and Holly have the following items for 2009: Dividend income Interest income Itemized deductions (none of the amount resulted from a casualty loss) Business capital gains Business capital losses $5,000 7,000 (9,000) 1,000 (3,000)
In calculating their net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0. b. $1,300. c. $1,400. d. $3,000. e. None of the above. ANS: C $3,000 [$1,000 + ($12,000 $11,400*)] = $1,400. *Standard deduction would be used. PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
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PROBLEM
2010 Annual Edition/Test Bank
1. Teresa had the following items for last year: Salary Short-term capital gain Nonbusiness bad debt For the current year, Teresa had the following items: Salary Nonbusiness bad debt Collection of last years bad debt Determine Teresas adjusted gross income for the current year. ANS: Salary Income under tax benefit rule Short-term capital loss (nonbusiness bad debt) AGI Income on collection of nonbusiness bad debt (classified as STCL) to the extent of tax benefit in the prior year ($3,000 offset against short-term capital gain and $3,000 offset against ordinary income) PTS: 1 OBJ: 1 MSC: 10 min DIF: 2 REF: p. 7-4 | p. 7-5 NAT: AICPA FN-Measurement | AACSB Analytic $45,000 6,000 (1,000) $50,000 $ 6,000 $45,000 (1,000) 10,000 $40,000 3,000 (10,000)
2. Maria, who is single, had the following items for 2009: Salary Loss on sale of 1244 small business stock acquired 3 years ago Stock acquired 2 years ago became worthless during the year Long-term capital gain Nonbusiness bad debt Casualty gain on property held 4 years Determine Marias adjusted gross income for 2009. ANS: Salary Ordinary loss from 1244 stock Capital gains and losses Long-term capital gain ($17,000 + $4,000) Less: Long-term capital loss [($60,000 $50,000) + $5,000] Net long-term capital gain Less: Short-term capital loss Net short-term capital loss Adjusted gross income PTS: 1 DIF: 2 REF: p. 7-4 to 7-7 NAT: AICPA FN-Measurement | AACSB Analytic $80,000 (50,000) $21,000 (15,000) $ 6,000 (8,000) (2,000) $28,000 OBJ: 1 | 2 | 3 | 4 MSC: 10 min $80,000 (60,000) (5,000) 17,000 (8,000) 4,000
Deductions and Losses: Certain Business Expenses and Losses
3. Mike, single, age 31, had the following items for 2009: Salary Nonbusiness bad debt Casualtiesindependent events Asset A (personal use property held for two years)gain Securities (stolen)loss Dividends Interest expense on personal residence Compute Mikes taxable income for 2009. ANS: Salary Dividends Casualty gain (long-term capital gain) Nonbusiness bad debt (short-term capital loss) Net short-term capital loss Adjusted gross income Less: Interest expense on personal residence Miscellaneous itemized deduction: casualty loss Personal exemption Taxable income PTS: 1 OBJ: 1 | 4 MSC: 15 min $42,000 1,000 $2,000 (4,500) (2,500) $40,500 (10,000) (5,000) (3,650) $21,850 $42,000 (4,500) 2,000 (5,000) 1,000 10,000
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DIF: 2 REF: p. 7-5 | p. 7-13 | p. 7-14 NAT: AICPA FN-Measurement | AACSB Analytic
4. Julie, who is single, has the following items for 2009: Salary $140,000. A hurricane completely destroyed Julies duplex during the current year. Julie lived in one-half of the duplex and rented out the other half. Julie paid $400,000 for the duplex and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex was worth $420,000 at the time of the destruction. Julies insurance policy paid her 90% of the fair market value of the duplex. Household items destroyed in the hurricane had a basis of $15,000 and a fair market value of $8,500. There was no insurance recovery on the household items. Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the painting was worth $10,000. Julie purchased the painting as an investment with the intent that she would sell it when its value exceeded $12,000. There was no insurance recovery on the painting. Home mortgage interest $10,000.
Determine the amount of Julies taxable income for the current year.
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2010 Annual Edition/Test Bank
ANS: Salary Plus: Gain on rental duplex Recovery [($420,000 90%) 50%] $200,000 Cost (50% 400,000) Less: cost recovery (80,000) Adjusted basis Casualty gain AGI Less: Itemized deductions Casualty loss Dwelling $200,000 Basis ($400,000 50%) Recovery (189,000) Loss $ 11,000 Household items 8,500 Total loss $ 19,500 Less: $500 floor (500) (20,900) 10% $209,000 (AGI) Deductible loss Home mortgage interest Other miscellaneous itemized deductionpainting Total itemized deductions Personal exemption Taxable income PTS: 1 OBJ: 3 | 4 MSC: 15 min
$140,000 $189,000
(120,000) 69,000 $209,000
$
0 10,000 4,000 (14,000) (3,650) $191,350
DIF: 3 REF: p. 7-10 to 7-14 NAT: AICPA FN-Measurement | AACSB Analytic
5. Juanita, single and age 43, had the following items for 2009: Salary Interest income Casualty loss on long-term business property Casualty loss on rental property Loss on theft of securities Personal casualty gains Personal casualty loss (after $500 floor) Other itemized deductions Compute Juanitas taxable income for 2009. $60,000 6,000 (15,000) (5,000) (8,000) 6,000 (13,000) (9,000)
Deductions and Losses: Certain Business Expenses and Losses
ANS: Salary Interest income Casualty loss on business property Casualty loss on rental property Personal casualty gains $6,000 Personal casualty loss (6,000) AGI Less: Itemized deductions Casualty loss [($13,000 $6,000) (10% $46,000)] Theft of securities Other itemized deductions Personal exemption Taxable income PTS: 1 OBJ: 4 MSC: 15 min DIF: 3 REF: p. 7-10 to 7-15 NAT: AICPA FN-Measurement | AACSB Analytic
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$60,000 6,000 (15,000) (5,000) 0 $46,000 (2,400) (8,000) (9,000) (3,650) $22,950
6. While Susan was on vacation during the current year, someone broke into her home and stole the following items: A computer used 60% in connection with Susans rental property and 40% for her personal use. The cost of the computer was $8,000. Depreciation of $1,000 had been taken on the computer and it had a fair market value of $4,000 at the time of the theft. A painting, which Susan purchased as an investment for $10,000, had a fair market value of $17,000. Silverware purchased for $3,000 had a fair market value of $5,000. Cash of $30,000.
Susans adjusted gross income, before considering any of the above items, is $60,000. Determine the total amount of Susans itemized deductions resulting from the theft.
7-40
ANS: AGI before theft loss Less: loss on rental computer Cost ($8,000 60%) Depreciation Adjusted basis AGI Painting loss (investment property) Casualty loss Computer ($4,000 40%) Silverware Cash Total Less: $500 floor 10% $56,200 (AGI) Total itemized deductions PTS: 1 OBJ: 4 MSC: 15 min
2010 Annual Edition/Test Bank
$60,000 $4,800 (1,000) (3,800) $56,200 $10,000 $ 1,600 3,000 30,000 $34,600 (500) (5,620)
28,480 $38,480
DIF: 3 REF: p. 7-10 to 7-14 NAT: AICPA FN-Measurement | AACSB Analytic
7. Neal, single and age 37, has the following items for 2009: Salary Casualty loss on business property Casualty loss on rental property Personal casualty gains Personal casualty losses (after $500 floor) Interest expense on personal residence Determine Neals taxable income for 2009. ANS: Salary Casualty loss on business property Casualty loss on rental property Personal casualty gains Personal casualty losses AGI Less: Itemized deductions Casualty loss ($12,000 $3,000) Less: 10% $37,000 (AGI) Casualty loss deduction Interest expense Personal exemption Taxable income PTS: 1 OBJ: 4 MSC: 15 min $50,000 (8,000) (5,000) $3,000 (3,000) $9,000 (3,700) $5,300 7,000 0 $37,000 $50,000 (8,000) (5,000) 3,000 (12,000) (7,000)
(12,300) (3,650) $21,050
DIF: 3 REF: p. 7-10 to 7-14 NAT: AICPA FN-Measurement | AACSB Analytic
Deductions and Losses: Certain Business Expenses and Losses
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7-42
2010 Annual Edition/Test Bank
8. In 2008, Robin Corporation incurred the following expenditures in connection with the development of a new product: Salaries Supplies Market survey Depreciation $50,000 20,000 10,000 15,000
In 2009, Robin incurred the following additional expenditures in connection with the development of the product: Salaries Supplies Depreciation Advertising $75,000 15,000 17,000 8,000
In October 2009, Robin began receiving benefits from the project. If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction. ANS: Deductibility of research and experimental expenditures is permitted in the year of incurrence. 2008 Salaries Supplies Depreciation Deductible expenses The market survey is not a research and experimental expenditure. 2009 Salaries Supplies Depreciation Deductible expenses The advertising is not a research and experimental expenditure PTS: 1 OBJ: 5 MSC: 10 min DIF: 1 REF: p. 7-15 | p. 7-16 NAT: AICPA FN-Measurement | AACSB Analytic $ 75,000 15,000 17,000 $107,000 $50,000 20,000 15,000 $85,000
Deductions and Losses: Certain Business Expenses and Losses
9. Green, Inc., manufactures and sells widgets. During 2009, an examination of the company records showed the following items: Domestic production gross receipts Cost of goods sold for domestic products Expenses directly related to domestic production gross receipts (other than wages) W-2 wages paid to employees engaged in qualified domestic production activities Ratable portion of other expenses Total W-2 wages Taxable income Determine Greens domestic production activities deduction for 2009. ANS: Domestic production gross receipts Less: Cost of goods sold Direct expenses W-2 wages directly related Allocated expenses Qualified production activities income (QPAI) Domestic production activities deduction Lessor of: QPAI 6% ($1,700,000 6%) Taxable income 6% ($1,600,000 6%) Limited to 50% of related W-2 wages (50% $150,000) PTS: 1 OBJ: 6 MSC: 10 min DIF: 3 REF: p. 7-17 to 7-19 NAT: AICPA FN-Measurement | AACSB Analytic $3,000,000 (750,000) (300,000) (150,000) (100,000) $1,700,000 $3,000,000 750,000 300,000 150,000 100,000 250,000 1,600,000
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$ $
96,000 75,000
10. Nora, divorced with two dependent children, had the following income and deductions for 2009: Sales Business expenses Alimony received Interest income Dividends Nonbusiness capital gains 1244 stock loss Itemized deductions Business capital loss Business capital gain Compute Nors net operating loss for 2009. $ 50,000 (100,000) 30,000 1,000 2,000 4,000 (18,000) (4,000) (2,000) 1,000
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2010 Annual Edition/Test Bank
ANS: Sales Business expenses Alimony received Interest income Dividends 1244 stock (ordinary loss) Capital gains ($4,000 + $1,000) Less: Capital losses Net capital gains Adjusted gross income Standard deduction (head of household) Personal and dependency exemptions (3 $3,650) Taxable income Taxable income Personal and depenency exemptions Excess of nonbusiness capital losses over nonbusiness capital gains Excess of nonbusiness deductions over sum of nonbusiness income and net nonbusiness capital gains Standard deduction Interest Dividends Alimony received Nonbusiness capital gains Excess of business capital losses over the sum of business capital gains and the excess of nonbusiness capital gains over nonbusiness deductions {$2,000 [$1,000 + ($1,000 + $2,000 + $30,000 + $4,000 $8,350)]} Net operating loss PTS: 1 OBJ: 3 | 7 MSC: 20 min
$ 50,000 (100,000) 30,000 1,000 2,000 (18,000) $5,000 (2,000) 3,000 ($ 32,000) (8,350) (10,950) ($ 51,300) ($ 51,300) 10,950 0
$8,350 (1,000) (2,000) (30,000) (4,000)
0
0 ($ 40,350)
DIF: 3 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
11. Juan, married and filing jointly, had the following income and deductions for 2009: Sales Business expenses Interest income Dividends Personal casualty loss (after deducting the $500 floor) Personal casualty gain Taxes paid on personal residence Interest paid on personal residence Juan has three dependent children. Calculate the net operating loss for 2009. $600,000 (650,000) 3,000 4,000 (25,000) 8,000 (7,000) (9,000)
Deductions and Losses: Certain Business Expenses and Losses
ANS: Sales Business expense Interest income Dividends Personal casualty gains Personal casualty losses Adjusted gross income Less: Itemized deductions Casualty loss [$25,000 $8,000 (10% $0)] Taxes on personal residence Interest on personal residence Personal and dependency exemptions (5 $3,650) Taxable income Taxable income Personal and dependency exemptions Excess of nonbusiness deductions over nonbusiness income: Itemized deductions ($33,000 $17,000) Interest income Dividends Net operating loss PTS: 1 OBJ: 4 | 7 MSC: 20 min
7-45
$600,000 (650,000) 3,000 4,000 8,000 (8,000) ($ 43,000) $17,000 7,000 9,000
(33,000) (18,250) ($ 94,250) ($ 94,250) 18,250
$16,000 (3,000) (4,000)
9,000 ($ 67,000)
DIF: 3 REF: p. 7-15 | p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
12. Jason, married and filing jointly, had the following income for 2009: Salary Loss on the sale of 1244 stock held for 5 years Dividends Interest income Itemized deductions (no casualty losses) Jason has four dependent children. Calculate the net operating loss for 2009. $ 70,000 (110,000) 25,000 10,000 (12,000)
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2010 Annual Edition/Test Bank
ANS: Salary Ordinary loss ( 1244 stock) Long-term capital loss [($110,000 $100,000) = $10,000] limited to Dividends Interest income AGI Itemized deductions Personal exemptions (6 $3,650) Taxable income Taxable income Excess of nonbusiness deductions over nonbusiness income [$12,000 ($25,000 + $10,000 $3,000)] Personal exemptions (6 $3,650) Net operating loss PTS: 1 OBJ: 2 | 7 MSC: 15 min ESSAY DIF: 2 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
$ 70,000 (100,000) (3,000) 25,000 10,000 $ 2,000 (12,000) (21,900) ($ 31,900) ($ 31,900) 0 21,900 ($ 10,000)
1. Identify the factors that should be considered in determining whether a transaction is a bona fide loan or a gift. ANS: Factors to be considered in determining whether a transaction is a bona fide loan or gift are as follows: Was a note properly executed? Was there a reasonable rate of interest? Was collateral provided? What collection efforts were made? What was the intent of the parties? DIF: 1 REF: p. 7-5 | p. 7-6 NAT: AICPA FN-Reporting | AACSB Analytic
PTS: 1 OBJ: 1 MSC: 5 min
2. A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year. Identify factors that should be considered in deciding in which year to take the loss.
Deductions and Losses: Certain Business Expenses and Losses
ANS: Factors that should be considered include: The marginal tax rates of the two different years. The adjusted gross incomes of the two different years. Other casualty losses in the two different years. The benefits of a faster refund (or reduction of tax). OBJ: 4 MSC: 5 min
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PTS: 1 DIF: 1 REF: p. 7-27 NAT: AICPA FN-Reporting | AACSB Analytic
3. Discuss the treatment of casualty and theft losses incurred with property in a transaction entered into for profit. ANS: These losses are not subject to the $100 ($500 in 2009) per event floor and the 10% of AGI limitations. If these losses are attributable to rents or royalties, the deduction is for AGI. However, if the losses are not connected with property held for the production of rents or royalties, they are deductions from AGI. These losses are itemized deductions which are not subject to the 2%-of-AGI floor. PTS: 1 DIF: 1 REF: p. 7-13 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 4 MSC: 5 min
4. What are the three methods of handling research and experimental expenditures incurred in a trade or business? Under what circumstances would you choose each? ANS: The following methods are permitted: The expense method, where the expenditures are written off immediately, is attractive where the taxpayer is currently in a high tax bracket and has sufficient other income to offset the deductions. Deferral and amortization of expenditures over a period of not less than 60 months is generally chosen when the total deduction is not wanted immediately because future income is expected to be available to offset the deduction. The capitalization method allows no deduction until the project is abandoned or becomes worthless. Usually taxpayers do not choose this method, since the tax benefit is deferred for an indefinite period. DIF: 1 REF: p. 7-15 | p. 7-16 NAT: AICPA FN-Reporting | AACSB Analytic
PTS: 1 OBJ: 5 MSC: 10 min
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2010 Annual Edition/Test Bank
5. Why was the domestic production activities deduction (DPAD) enacted by Congress? ANS: The American Jobs Creation Act of 2004 provision creating DPADs was enacted to replace certain tax provisions that our world trading partners regarded as allowing unfair advantage to U.S. exports. Note, however, in no way is the DPAD limited to exports. PTS: 1 DIF: 1 REF: p. 7-17 NAT: AICPA FN-Reporting | AACSB Analytic 6. How is qualified production activities income (QPAI) calculated? ANS: QPAI is calculated as follows: The excess of domestic production gross receipts (DPGR) over the sum of: Cost of goods sold allocated to such receipts. Other deductions, expenses, or losses directly allocated to such receipts. The ratable portion of deductions, expenses, and losses not directly allocable to such receipts or another class of income. DIF: 1 REF: p. 7-18 | p. 7-19 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 6 MSC: 5 min
PTS: 1 OBJ: 6 MSC: 5 min
7. Sally is an employee of Blue Corporation. Last year, she purchased a very expensive computer with her own funds. She used the computer 100% for business purposes. During the current year, the computer was completely destroyed in a fire. Blue Corporation did not reimburse her for her loss. Discuss whether Sallys loss will create or increase Sallys net operating loss. ANS: The loss is incurred in connection with Sallys trade or business. However, because Sally is an employee and the loss is not reimbursed, it is an itemized deduction which is a deduction from adjusted gross income. The loss is not incurred in a transaction entered into for profit nor is the loss a casualty loss on personal use property. Therefore, Sallys loss will not create or increase Sallys NOL. PTS: 1 OBJ: 3 | 7 MSC: 5 min DIF: 1 REF: p. 6-4 | p. 7-8 | p. 7-21 | p. 7-22 NAT: AICPA FN-Reporting | AACSB Analytic
Deductions and Losses: Certain Business Expenses and Losses
8. Discuss the calculation of nonbusiness deductions for purposes of determining an individuals NOL.
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ANS: The amount of nonbusiness deductions is equal to the total itemized deductions less personal casualty and theft losses and losses associated with a transaction entered into for profit which are deducted as other itemized deductions not subject to the 2%-of-AGI reduction. If a taxpayer does not itemize deductions, the amount of nonbusiness deductions is the amount of the standard deduction. PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 7-21 | p. 7-22 NAT: AICPA FN-Measurement | AACSB Analytic
9. Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback year. ANS: The NOL amount to be carried forward is the excess of the NOL over the taxable income of the year to which the NOL is being applied. However, the taxable income of the year to which the NOL is being applied must be computed with the following modifications: No deduction is allowed for the excess of capital losses over capital gains. No deduction is allowed for the NOL that is being carried back. However, deductions are allowed for NOLs occurring before the loss year. Any deductions claimed that are based on or limited by AGI must be determined after making the preceding adjustments. However, charitable contributions do not take into account any NOL carryback. No deduction is allowed for personal or dependency exemptions. OBJ: 7 MSC: 10 min
PTS: 1 DIF: 2 REF: p. 7-25 NAT: AICPA FN-Measurement | AACSB Analytic