South-Western Federal Taxation 2017 Comprehensive, 40th Edition by William H. Hoffman -Test bank

South-Western Federal Taxation 2017 Comprehensive, 40th Edition by William H. Hoffman -Test bank

Chapter 07 – 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 $17,000 in final settlement of the account. James can take a $2,000 bad debt deduction in the current year.

a.

True

b.

False

ANSWER:

False

RATIONALE:

James has a basis of $15,000 in the account receivable and hence, he has income of $2,000.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Application

OTHER:

Time: 2 min.

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.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

3. Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The taxpayer must include the $10,000 in gross income to the extent of the tax benefit received last year. The entire $10,000 deduction provided a tax benefit; $8,000 offset by the short-term capital gain and $2,000 offset against ordinary income.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Application

OTHER:

Time: 5 min.

4. A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

5. If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

6. A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The deduction can only be taken in the year the debt becomes totally worthless.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

7. A business bad debt is a debt unrelated to the taxpayer’s trade or business either when it was created or when it became worthless.

a.

True

b.

False

ANSWER:

False

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

8. In determining whether a debt is a business or nonbusiness bad debt, the debtor’s use of the borrowed funds is important.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The use of the funds by the debtor is of no consequence in making the determination. The determination is made at the creditor level.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

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

a.

True

b.

False

ANSWER:

False

RATIONALE:

The nonbusiness bad debt provisions do not apply to corporations.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

10. A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

11. The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.

a.

True

b.

False

ANSWER:

False

RATIONALE:

A taxpayer is entitled to deduct the net amount of the loss only upon final settlement of the debt.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

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

a.

True

b.

False

ANSWER:

False

RATIONALE:

A bona fide debt arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed sum of money regardless of the relationship of the parties.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

13. A bond held by an investor that is uncollectible will be treated as a worthless security and hence, produce a capital loss.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-01 – LO: 7-01
CMPV.SWFT.LO: 7-02 – LO: 7-02

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

14. A loss from a worthless security is always treated as a short-term capital loss.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The last day treatment increases the likelihood that the capital loss will be classified as long term, but is not automatic. So the capital loss could be either short term or long term.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-02 – LO: 7-02

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

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

a.

True

b.

False

ANSWER:

True

RATIONALE:

A loss is allowed for securities that become completely worthless during the tax year.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-02 – LO: 7-02

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

16. Several years ago, John purchased 2,000 shares of Red Corporation § 1244 stock from Mark for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining Red Corporation stock for $3,000. John has a $17,000 ($3,000 – $20,000) ordinary loss for the current year.

a.

True

b.

False

ANSWER:

False

RATIONALE:

John did not buy the stock from Red Corporation, and therefore, it is not § 1244 stock to him. John has a $17,000 long-term capital loss.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-02 – LO: 7-02

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Application

OTHER:

Time: 2 min.

17. If a taxpayer sells their § 1244 stock at a loss, all of the loss will be ordinary loss.

a.

True

b.

False

ANSWER:

False

RATIONALE:

Ordinary loss treatment is limited to $50,000 per year for single taxpayers and $100,000 per year for married filing jointly taxpayers.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-02 – LO: 7-02

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

18. Al, who is single, has a gain of $40,000 on the sale of § 1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock. As a result, Al has a $40,000 ordinary loss.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The $40,000 gain on the sale of the § 1244 stock is classified as a capital gain. The $80,000 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 $30,000 is classified as a capital loss. Therefore, Al has capital gain net income of $10,000 ($40,000 – $30,000).

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-02 – LO: 7-02

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Application

OTHER:

Time: 5 min.

19. An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.

a.

True

b.

False

ANSWER:

True

RATIONALE:

Only an individual’s loss on personal use property must meet the definition of a casualty to be deductible.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-03 – LO: 7-03
CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

20. “Other casualty” means casualties similar to those associated with fires, storms, or shipwrecks.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-03 – LO: 7-03
CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

21. A father cannot claim a loss on his daughter’s rental use property.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

22. The current position of the IRS is that a personal casualty loss deduction is not allowed for losses resulting from termites.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

23. If the amount of the insurance recovery for a theft of business property is greater than the asset’s fair market value but less than it’s adjusted basis, a gain is recognized.

a.

True

b.

False

ANSWER:

False

RATIONALE:

Loss is recognized if the amount of the insurance recovery is less than the asset’s adjusted basis.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

24. A theft loss is taken in the year of the theft.

a.

True

b.

False

ANSWER:

False

RATIONALE:

A theft loss is taken in the year of discovery.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

25. Last year, Amos had AGI of $50,000. Amos also had a diamond ring stolen which cost $20,000 and was worth $17,000 at the time of the theft. He itemized deductions on last year’s tax return. In the current year, Amos recovered $17,000 from the insurance company. Therefore, he must include $11,900 in gross income on the tax return for the current year.

a.

True

b.

False

ANSWER:

True

RATIONALE:

The reimbursement need only be included to the extent the previous deduction resulted in a tax benefit. The benefit was $11,900 [$17,000 – $100 – (10% × $50,000)].

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Application

OTHER:

Time: 2 min.

26. If investment property is stolen, the amount of the loss is the adjusted basis of the property at the time of the theft reduced by $100 and 10% of AGI.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The amount of the loss is not subject to the $100 and 10%-of-AGI limitations.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

27. The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.

a.

True

b.

False

ANSWER:

False

RATIONALE:

Under certain circumstances, the cost of repairs to damaged property may be an acceptable measure of the loss in value of the property.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

28. Taxpayer’s 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 be subject to the 10%-of-AGI reduction based on the AGI of the current year.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The loss will be subject to the 10%-of-AGI reduction based on the AGI of the prior year.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

29. The amount of loss for partial destruction of business property is the decline in fair market value of the business property.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The amount of the loss is the lesser of the adjusted basis or the decline in fair market value of the property.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

30. If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized deduction.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Comprehension

OTHER:

Time: 2 min.

31. The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

32. Losses on rental property are classified as deductions for AGI.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

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 first year.

a.

True

b.

False

ANSWER:

False

RATIONALE:

The loss in the second year is reduced by 10% of AGI for the second year.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Measurement –

AICPA: FN-Measurement

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

34. A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.

a.

True

b.

False

ANSWER:

True

RATIONALE:

A theft loss is a separately stated item on Schedule A of Form 1040. It is not subject to the 2%-of-AGI floor.

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-04 – LO: 7-04

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.

35. Research and experimental expenditures do not include the cost of consumer surveys.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

CMPV.SWFT.LO: 7-05 – LO: 7-05

NATIONAL STANDARDS:

United States – BUSPORG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

OTHER:

Time: 2 min.