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Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year?

None of the above.

Jed is an electrician. Jed and his wife are accrual 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.

c. $3,000.

On June 2, 2013, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000. Fred's TV Sales uses the accrual method. In 2014, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could not expect to recei

a. $0.

Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her taxable income for last year was an NOL of $15,000. During the current year, she unexpectedly collected
$12,000 on the debt. How should Ma

$8,000 income.

Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $97,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections

e. None of the above.

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

None of the above.

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 m

$3,000 deduction.

Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank's Auto. As partial payment for t

c. $15,500.

On September 3, 2013, Able, a single individual, purchased � 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2013, the stock was worth $85,000. On August 15, 2014, Able was notified that the stock was worthless. How should Ab

None of the above.

On February 20, 2013, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2014, the stock became worthless. During 2014, Bill also had an $8,000 loss on � 1244 small business stock purchased two years ago

$8,000 ordinary loss and $3,000 short-term capital loss.

John files a return as a single taxpayer. In 2014, 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 $6,000.
Determine John's AGI for 2014.

b. $0.

Bruce, who is single, had the following items for the current year:
� Salary of $80,000.
� Gain of $20,000 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 stoc

a. $27,000.

On July 20, 2013, 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, 2013, Matt purchased an additional 1,000 shares of Orange Corporation stock from a

None of the above.

Which of the following events would produce a deductible loss?

a. None of the above.

In 2014, 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.
Fair Market Value Insurance Asset Adjusted Basis
Before After
Recovery
A 9,200 $8,000 $

none of the above

Jim had a car accident in 2014 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 business use. Jim received an insuran

e. None of the above.
RATIONALE: The car is used for business use and hence, the amount of the loss is $40,000 (adjusted basis) reduced by the insurance recovery ($21,000). The $19,000 loss is not subject to the $100 floor per event and the 10%-of-AGI lim

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2014. The car's adjusted basis at the time of the accident was $13,000. Its fair market value was $10,000. The car was covered by a $2,000 deductible insuranc

. $500.
Amount (lesser of adjusted basis or FMV decline) $10,000 Less: Insurance recovery as if the claim had been filed (8,000) Statutory floor (100)
AGI limitation (10% � $14,000) (1,400) Deductible loss $500
The loss is permitted for the uninsured port

In 2014, Grant's personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent dat

a. $0.
RATIONALE: The proceeds received are $250,000. Therefore, Grant has no casualty gain or a casualty loss.

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 fa

d. $18,750.
Amount of loss (adjusted basis for business property that is completely destroyed)
$90,000
Less: Insurance proceeds received ($75,000 95%)
(71,250)
Business loss
$18,750
A business casualty loss is classified as an ordinary loss.

If a taxpayer has an NOL in 2014 of $20,000, of which $8,000 is attributable to a theft of rental use property, the taxpayer may:

Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years.

In 2014, Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant. The partnership incurs a loss with $100,000 being Arnold's share. Which of the following statements is incorrect?

Arnold's $100,000 loss is nondeductible in 2014 and 2015 under the passive loss provisions.

Last year, Ted invested $100,000 for a 50% interest in a partnership in which he was a material participant. The partnership incurred a loss, and Ted's share was $150,000. Which of the following statements is incorrect?

None of the above is incorrect.

In 2014, Joanne invested $90,000 for a 20% interest in a limited liability company (LLC) in which she is a material participant. The LLC reported losses of $340,000 in 2014 and $180,000 in 2015. Joanne's share of the LLC's losses was $68,000 in 2014 and $

b. $68,000 in 2014; $22,000 in 2015.
RATIONALE: Joanne's losses are not subject to the passive loss rules in either year because she is a material participant in the activity. However, the at-risk rules limit her total losses to $90,000 ($68,000 in 2014 a

n 2014, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2014 and $100,000 in 2015, Kipp's share being $60,000 in 2014 and $30,000 in 2015. How much of the losses from

e. None of the above.

Josh has investments in two passive activities. Activity A (acquired three years ago) produces income of $30,000 this year, while Activity B (acquired two years ago) produces a loss of $50,000. What is the amount of Josh's suspended loss for the year?

c. $20,000.
RATIONALE: The $30,000 of passive income is offset by $30,000 of the $50,000 passive loss, leaving a net passive loss of $20,000. None of the $20,000 net passive loss is deductible in the current year and it is all suspended.

Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment

d. $245,000.
RATIONALE: Carl's net income after considering the passive investments is $245,000 ($200,000 active income +$45,000 portfolio income). He is not allowed to offset the net passive loss against active or portfolio income.

Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to this property total $45,000. The total gain and the taxable gain are:

$60,000 total gain; $15,000 taxable gain.
RATIONALE: $105,000 amount realized - $45,000 adjusted basis = $60,000 total gain - $45,000 suspended loss =$15,000 taxable gain.

1. Matt has three passive activities and has at-risk amounts in excess of $100,000 for each. During the year, the activities produced the following income (losses).
Activity A
($60,000)
Activity B
(40,000)
Activity C
75,000
Net passive loss
($25,000)
Matt

c. $15,000 is allocated to A; $10,000 to B.
RATIONALE: $60,000/$100,000 � $25,000 = $15,000 allocated to Activity A
$40,000/$100,000 � $25,000 = $10,000 allocated to Activity B

Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year. In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago. Consider the following two statements:
(1)

Both statements 1 and 2.
RATIONALE: A closely held C corporation that is not a personal service corporation can offset passive losses against active income, but a personal service corporation cannot. Both statements are correct.

White Corporation, a closely held personal service corporation, has $150,000 of passive losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive loss can White Corporation deduct?

a. $0.
RATIONALE: White Corporation, a personal service corporation, cannot offset the passive loss against the active or portfolio income.

Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both de

If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income.
RATIONALE: Charles may choose to treat the two departments as either a single activity or as separate activities. If the two depa

Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away.

All four businesses can be treated as a single activity if Tara elects to do so.
RATIONALE: All four businesses may be treated as a single activity because of common ownership.

Rick, a computer consultant, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business.

If Rick participates for 550 hours and the employee participates for 2,000 hours during the year, Rick qualifies as a material participant.
RATIONALE: Option a. is incorrect; Rick would have to participate for more than 500 hours for statement a. to be co

Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year. He has one employee who works part-time in the business.

If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant.
RATIONALE: Option a. is incorrect; Ned participates for more than 100 hours and this is not less than the participati

Ahmad owns four activities. He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. Which of the following statements is correct?

Activities A, B, and C are significant participation activities.
RATIONALE: Statement b. is correct. Activities A, B, and C are all significant participation activities. A significant participation activity is one in which the individual's participation e

Paula owns four separate activities. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours

None of the above.
RATIONALE: Activities A, B, and C are all significant participation activities, but Activity D is not. A significant participation activity is one in which the individual's participation exceeds 100 hours during the year. The material p

Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E.

Dena is a material participant with respect to Activities B, C, D, and E.
RATIONALE: Activity A is not a significant participation activity because Dena does not participate for more than 100 hours. She is not a material participant with respect to Activi

Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. Ho

Maria can offset the $80,000 loss against the $150,000 of income from the retail store.
RATIONALE: Because Maria materially participated in the restaurant activity for at least five of the last ten taxable years before the current year (Test 5), she is st

Leigh, who owns a 50% interest in a sporting goods store, was a material participant in the activity for the last fifteen years. She retired from the sporting goods store at the end of last year and will not participate in the activity in the future. Howe

Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store.
RATIONALE: Because Leigh materially participated in the sporting goods activity for at least five of the last ten taxable years bef

Jed spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that he owns at a resort community. He also owns a music store in another city that is operated by a full-time employee. He elects not to group them together as a single activit

Only the music store is a passive activity.
RATIONALE: The bicycle rental store is not treated as a rental activity because the average period of customer use is 7 days or less. Jed participates for more than 500 hours during the year; therefore, the bicy

Jenny spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that she owns at a resort community. She also owns a music store in another city that is operated by a full-time employee. Jenny spends 140 hours per year working at the music

Neither store is a passive activity.
RATIONALE: A bicycle rental store is not treated as a rental activity because the average period of customer use is 7 days or less. Because Jenny participates for more than 500 hours during the year, the bicycle rental

Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Josh's at

c. $40,000.
RATIONALE: The $60,000 of passive income from Activity A is offset by $60,000 of the passive loss from Activity B, leaving a net passive loss of $40,000. None of the $40,000 net passive loss is deductible in the current year. The $40,000 net p

Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000. How is her loss characterized?

$40,000 is suspended under the passive loss rules and $10,000 is suspended under the at-risk rules.
RATIONALE: $10,000 of Rita's loss is suspended under the atrisk rules, leaving a potential deduction of $40,000. However, the $40,000 loss is suspended und

Art's atrisk amount in a passive activity was $60,000 at the beginning of 2013. His loss from the activity in 2013 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive income from the activity in 2014. Under the pa

d. $60,000.
RATIONALE: In 2013, Art had an $80,000 loss, $20,000 of which was suspended under the at-risk rules; $60,000 was suspended under the passive loss rules. The $20,000 of passive income in 2014 increases Art's at-risk amount and allows for reclas

Vic's atrisk amount in a passive activity is $200,000 at the beginning of the current year. His current loss from the activity is $80,000. Vic had no passive activity income during the year. At the end of the current year:

Wes has a loss of $35,000 suspended under the passive loss rules.
RATIONALE: The at-risk amount of $25,000 is reduced to zero by $25,000 of the passive loss. As a result, the $10,000 unused loss is suspended under the at-risk rules. The $25,000 of passive

Jon owns an apartment building in which he is a material participant and a computer consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spe

Neither the apartment building nor the computer consulting business is a passive activity.
RATIONALE: More than half of Jon's personal services are spent in a real property trade or business in which he materially participates, and the time spent exceeds

Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $95,000. Of the $27,000 loss,

d. $27,000.
RATIONALE: The entire loss may be deducted: $10,000 of the loss is deducted against the passive income from the limited partnership and the remaining $17,000 rental real estate loss is deducted against Pablo's salary because he actively partic

Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive loss from a real estate rental activity in which she actively participates. If her modified adjusted gross income is $155,000, how mu

b. $10,000.
RATIONALE: A rental loss of $10,000 is deducted against the passive income from the limited partnership interest. None of the remaining $16,000 rental loss is deducted against Josie's salary, even though she actively participates in the activi

Kate dies owning a passive activity with an adjusted basis of $100,000. Its fair market value at that date is $130,000. Suspended losses relating to the property were $45,000.

The heir's adjusted basis is $130,000, and Kate's final deduction is $15,000.
RATIONALE: The heir receives a $30,000 stepup in basis ($130,000 FMV - $100,000 decedent's basis). A $15,000 passive loss deduction is allowed on the decedent's final return ($4

Caroyl made a gift to Tim of a passive activity (adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000). No gift tax resulted from the transfer.

None of the above.
RATIONALE: Since the $20,000 suspended loss is included in basis, Tim's basis in the property is $70,000 ($50,000 +$20,000).