Chapter 7 Deductions And Losses: Certain Business Expenses And Losses

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Problems
28. LO.1 Several years ago, John Johnson, who is in the lending business, loaned Sara $30,000 to purchase an automobile to be used for personal purposes. In
August of the current year, Sara filed for bankruptcy, and John was notified that he could not expect to receive more than $4,000. As of the end of the current year,
John has received $1,000. John has contacted you about the possibility of taking a bad debt deduction for the current year.
Write a letter to John that contains your advice as to whether he can claim a bad debt deduction for the current year. Also prepare a memo for the tax files. John’s address is 100 Tyler Lane, Erie, PA 16563.
29. LO.1 Monty loaned his friend Ned $20,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $11,000, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $11,000 as a nonbusiness bad debt.
Last year, before considering the tax implications of the nonbusiness bad debt,
Monty had capital gains of $4,000 and taxable income of $20,000. During the current year, Ned paid Monty $10,000 in satisfaction of the debt. Determine Monty’s tax treatment for the $10,000 received in the current year.
30. LO.1 Sally is in the business of purchasing accounts receivable. Last year, Sally purchased an account receivable with a face value of $80,000 for $60,000. During the current year, Sally settled the account, receiving $65,000. Determine the maximum amount of the bad debt deduction for Sally for the current year.
31. LO.1, 2 Mable and Jack file a joint return. For the current year, they had the following items:
Salaries $120,000
Loss on sale of § 1244 stock acquired two years ago 105,000
Gain on sale of § 1244 stock acquired six months ago 20,000
Nonbusiness bad debt 19,000
Determine their AGI for the current year.
32. LO.2, 8 Mary, a single taxpayer, purchased 10,000 shares of § 1244 stock several years ago at a cost of $20 per share. In November of the current year, Mary received an offer to sell the stock for $12 per share. She has the option of either selling all of the stock now or selling half of the stock now and half of the stock in January of next year. Mary will receive a salary of $80,000 for the current year and $90,000 next year.
Mary will have long-term capital gains of $8,000 for the current year and $10,000 next year. If Mary’s goal is to minimize her AGI for the two years, determine whether she should sell all of her stock this year or half of her stock this year and half next year.
33. LO.3, 4, 8 Olaf lives in the state of Minnesota. A tornado hit the area and damaged his home and automobile. Applicable information is as follows:
Item
Adjusted
Basis FMV before FMV after
Insurance
Proceeds
Home $350,000 $500,000 $100,000 $280,000
Auto 60,000 40,000 10,000 20,000
Because of the extensive damage caused by the tornado, the President designated the area a disaster area.
Olaf and his wife, Anna, always file a joint return. Their 2015 tax return shows
AGI of $180,000 and taxable income of $140,000. In 2016, their return shows AGI of $300,000 and taxable income (exclusive of the casualty loss deduction) of $215,000.
Determine the amount of Olaf and Anna’s loss and the year in which they should take the loss.
34. LO.3, 4 Heather owns a two-story building. The building is used 40% for business use and 60% for personal use. During 2016, a fire caused major damage to the building and its contents. Heather purchased the building for $800,000 and has taken depreciation of $100,000 on the business portion. At the time of the fire, the building had a fair market value of $900,000. Immediately after the fire, the fair market value was $200,000. The insurance recovery on the building was $600,000. The contents of the building were insured for any loss at fair market value. The business assets had an adjusted basis of $220,000 and a fair market value of $175,000. These assets were totally destroyed. The personal use assets had an adjusted basis of $50,000 and a fair market value of $65,000. These assets were also totally destroyed.
If Heather’s AGI is $100,000 before considering the effects of the fire, determine her itemized deduction as a result of the fire. Also determine Heather’s AGI.
35. LO.3, 4 On July 24 of the current year, Sam Smith was involved in an accident with his business use automobile. Sam had purchased the car for $30,000. The automobile had a fair market value of $20,000 before the accident and $8,000 immediately after the accident. Sam has taken $20,000 of depreciation on the car. The car is insured for the fair market value of any loss. Because of Sam’s history, he is afraid that if he submits a claim, his policy will be canceled. Therefore, he is considering not filing a claim. Sam believes that the tax loss deduction will help mitigate the loss of the insurance reimbursement. Sam’s current marginal tax rate is 35%.
Write a letter to Sam that contains your advice with respect to the tax and cashflow consequences of filing versus not filing a claim for the insurance reimbursement for the damage to his car. Also prepare a memo for the tax files. Sam’s address is 450 Colonel’s Way, Warrensburg, MO 64093.
36. LO.5 Blue Corporation, a manufacturing company, decided to develop a new line of merchandise. The project began in 2016. Blue had the following expenses in connection with the project:
2016 2017
Salaries $500,000 $600,000
Materials 90,000 70,000
Insurance 8,000 11,000
Utilities 6,000 8,000
Cost of inspection of materials for quality control 7,000 6,000
Promotion expenses 11,000 18,000
Advertising –0– 20,000
Equipment depreciation 15,000 14,000
Cost of market survey 8,000 –0–
The new product will be introduced for sale beginning in July 2018. Determine the amount of the deduction for research and experimental expenditures for 2016, 2017, and 2018 if:
a. Blue Corporation elects to expense the research and experimental expenditures.
b. Blue Corporation elects to amortize the research and experimental expenditures over 60 months.
37. LO.6 Sarah Ham, operating as a sole proprietor, manufactures printers in the
United States. For 2016, the proprietorship has QPAI of $400,000. Sarah’s modified AGI was $350,000. The W–2 wages paid by the proprietorship to employees engaged in the qualified domestic production activity were $60,000. Calculate
Sarah’s DPAD for 2016.
38. LO.6 Barbara, a calendar year taxpayer, owns and operates a company that manufactures toys. For 2016, she has modified AGI of $500,000 and QPAI of $550,000. Ignoring the W–2 wage limitation, calculate Barbara’s DPAD.
39. LO.6 Red Corporation manufactures hand tools in the United States. For the current year, the QPAI derived from the manufacture of hand tools was $1 million.
Red’s taxable income for the current year was $2.0 million. Last year, Red had an
NOL of $800,000, which Red elected to carry forward. Calculate Red’s DPAD for the current year.
40. LO.6 Green Corporation manufactures skirts and blouses in the United States. The
DPGR derived from the manufacture of one skirt is $12, and the DPGR from one blouse is $10. The cost of goods sold is $5 for one skirt and $6 for one blouse.
Other allocated costs are $1 for one skirt and $5 for one blouse. What amount of
QPAI is available to Green for calculating the DPAD?