Chapter 8 Study

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Unless otherwise provided in the Code, personal expenses are not deductible.
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Terms in this set (28)
Unless otherwise provided in the Code, personal expenses are not deductible.
True
Quinn owns a house in Connecticut and an apartment in New Orleans. Quinn spends most of her time in Connecticut, so she sometimes rents out the apartment in New Orleans when she is not there. This year, Quinn rented out the apartment for thirty days and personally used the apartment for forty days. How will Quinn's rental activity be classified for tax purposes and why?
Mixed-use activity because Quinn rented out the apartment for more than 14 days and personally used the apartment for the greater of 14 days or 10% of the rental days
Rudy bought 10 shares of Fat Cat, Inc. stock on January 1,2019. Rudy paid $20 for each share. At first, it appeared that Rudy had made a good investment, as the price of Fat Cat stock rose to $50 per share on March 1, 2019. However, rumors of corporate wrongdoing soon started to circulate and the price of Fat Cat began to fall. On August 1, 2019, Fat Cat, Inc. declared bankruptcy and announced that the stockholders should not expect to receive anything on the liquidation of the corporation. What type of loss does Rudy have in 2019, if any?
Short term capital loss of $200
Trenton owns a country home that sometimes rents out to other people. Which of the following statements regarding Trenton's rental activity is correct?
If Trenton rents out the home for 180 days per year and uses the home personally for 20 days of the year, the activity will be considered a mixed-use activity
On December 31 of last year, Uli purchased 100 shares of Runway, Inc. (a publicly held company) for $5,000. On March 1 of this year, Runway, Inc. declared that it was bankrupt, that it will wind up operations, and that all of its assets will be used to satisfy secured creditor claims so there will be no residual equity left for the stockholders. Which of the following statements describes the tax treatment of this transaction?
Uli may deduct the $5,000 investment as a short-term capital loss
This is because since the company became worthless during the year, a constructive sale of the stock occurs on Dec 31 of this year. Therefore, Uli has a short term holding period because she is deemed to have held the stock for exactly one year where long term holding periods require at LEAST one year and one day.
Vince, a single individual, is one of the founders and original shareholders of Security Consulting, Inc., a corporate security consulting firm. The company was initially capitalized with $200,000, and Vince was a 50 percent owner. The company was structured as a C corporation. Filing requirements and permissible tax elections that could benefits the owners were made at the time the company was created. After several years of successful operations, Security Consulting lost market share to large national firms, and eventually closed down operations. Since it had no assets other than the goodwill of the business, there was nothing left to distribute to the shareholders. Assuming that there were no changes to Vince's ownership interest over the period of his ownership, and that Vince had no capital transactions in the current year, by how much can Vince reduce his adjusted gross income this year due to the company becoming worthless (assuming he has no other capital gains)?
The correct answer is $53,000
This is because it was capitalized with less than $1 million and Vince was an original shareholder, the stock is Section 1244 stock in Vince's hands. Vince can deduct up to $50,000 of losses as an ordinary loss in any one tax year and the remaining loss is treated as a capital loss. Therefore, Vince will be able to deduct $50,000 of his loss as a Section 1244 loss against ordinary income and will qualify for an additional $3,000 long-term capital loss deduction. The remaining capital loss of $47,000 will be carried forward to future tax years.
Expenses from hobby activities are no longer deductible since miscellaneous deductions subject to 2% hurdle are no longer deductible.
true
Reilly owns and operates an accounting practice as a sole proprietorship. For tax reporting, Reilly uses the accrual method of accounting. Last year, Reilly prepared a tax return for a client and billed the client $600. The client did not pay and has recently disappeared. The reminder notices that Reilly's secretary had sent to the client have been returned with no forwarding address. How should this bad debt be treated for income tax purposes?
Reilly may deduct $600 from his business income
On December 1, Allison reviews her investment portfolio and finds out that she has had a very profitable year. To offset some of her gains, Allison sells 100 shares of Little Bear Corporation for $10,000. She purchased those shares for $15,000 two years earlier. On December 25 of the same year, Allison reads a newspaper article indicating that the price of Little Bear Corporation is expected to increase substantially. Second-guessing the wisdom of selling her previous shares of Little Bear stock, she purchases 100 shares of Little Bear Corporation for $8,000. What are the tax consequences to Allison this year?
a $5,000 realized, but not recognized loss
A deduction for a nonbusiness bad debt is only allowed when the debt becomes totally worthless
true
Drug dealers should report their income on a tax return. T/F?truePolitical or lobbying contributions by an individual are tax deductible. T/F?falseJohn, a single individual, is an avid coin collector. To raise some money to support his hobby, John began to occasionally buy and sell coins about 10 years ago, incurring business-related expenses in those transactions. John does not consider himself to be in the business of dealing in coins, and over the time he has been selling coins, he has never made a profit. This year, John grossed $4,000 in sales, and had $4,500 in expenses associated with the activity. John's AGI for the year (including any inclusion due to the coin trading activity) is $50,000, and aside from the coin trading loss, his only other permissible itemized deductions are mortgage interest of $8,000 and real estate taxes of $2,500. Which of the following statements concerning this situation is correct? a. John will take the $500 loss from the coin business into his gross income b. John can offset the $4,000 in income with $4,000 of his expenses, so the coin trading activity will have no impact on his AGI c. The increase in John's taxable income as a result of the coin trading activity is $4,000 ($4,000 - $0 deduction since misc. deductions subject 2 % hurdle no longer deductible) d. John will have to report $4,000 of income but not be able to deduct any of the expenses.d. John will have to report $4000 of income but not be able to deduct any of the expensesSeth owns a mansion built on the cliff of a large island overlooking the Atlantic ocean. Each year, an international sailing race takes place around the Island, and large corporations descend on the town, inviting clients and business associates to entertain them. Carman Corporation, a custom designer of racing sailboats, is particularly interested in this event each year, and for the week and half of the race, they rent Seth's mansion, paying him $200,000. At first, Seth was hesitant to rent the home, but decided that since it would only be a week and a half, he could go on vacation himself at that time. Seth incurs some costs associated with the rental, including storage charges for his valuables of $10,000, cleaning expenses before and after the rental of $8,000 and he estimates that the pro-rata portion of the real estate taxes for the period of the rental is $1,000. How much income from this rental activity will be included in Seth's AGI?$0 Because he only rents for a week and a half which is less than the 14 days required to be taxableMicheal owns a beach home, which is his second home, in a national resort area. Since this home is only a vacation home, and he can generate substantial cash flow by renting the property, Michael lists the property with a real estate agent who successfully rents the property for 12 weeks a year. Michael and his family use the home for the entire month of September, for two weeks in January, and for two weeks in May each year. If Michael's gross income from the property is $60,000, and he has $75,000 of expenses (mortgage interest, real estate taxes, brokerage fees, and miscellaneous expenses) associated with the rental activity, which of the following statements is correct? a. Michael will be able to take a deduction for expenses limited to $60,000 b. Michael will report a $15,000 loss on the property for tax purposes this year c. The $15,000 loss on the property is suspended under the passive activity rules d. By increasing Michael's AGI, the inclusion of the income could result in the loss of some of Michael's otherwise allowable itemized.a. Michael will be able to take a deduction for expenses limited to $60,000 (Personal Use: 58 days Rental Use: 84 days (7x12) Taxed as a mixed activity because 58 is greater than 8.4 days (10%) and 15 days (limited to the 60k of income and the remaining 15k is remaining and can be carried forward to future years)Keegan owns and operates an engineering business as a sole proprietorship. For tax, reporting, Keegan uses the cash method. Last year, he provided services to a local builder, and upon completing the task he was asked to do, he sent an invoice to the builder for $5,000. The builder never paid the bill, and recently filed for bankruptcy, so Keegan will not be able to collect the amount due. How should this bad debt be treated for income tax purposes? a. No bad debt deduction is permitted b. Keegan may deduct $5,000 from his business income c. Keegan may deduct $5,000 as a short-term capital loss d. Keegan may deduct $5,000 as a long-term capital lossa. no bad debt deduction is permitted because it is the cash method and he never received money for it anywayTen years ago, Fernando loaned his son, Salvatore, $20,000 to start a business. The note required the payment of interest at a rate of nine percent for ten years, with a balloon payment of the principal at the end of the note term. Salvatore has been making interest payments on the note for the past six years, but this year his business took a turn for the worse and he was not able to make the annual interest payment of $1,800. The business was closed down, and Salvatore owed an amount greater than his net worth to secured creditors, so he informed his father that he would not be able to make the interest or principal payments on the mote. How should Fernando treat the default for income tax purposes? a. Fernando may deduct $20,000 as a short-term capital loss. b. Fernando may deduct $21,800 as a short-term capital loss. c. Fernando may deduct $20,800 as a long-term capital loss. d. Fernando may deduct $21,800 as a long-term capital loss.a. Fernando may deduction $20,000 as a short term capital loss.Harry, a married individual who files jointly with his wife, is one of the founders and original shareholders of Brittania Yacht Charters, Inc., a company that charters yachts for corporate events. The company was initially capitalized with $200,000, and Harry was a 50 percent owner. The company was structured as a C corporation, and all filing requirements and permissible tax elections that could benefit the taxpayers were made at the4 time the company was created. After several years of successful operations, Brittania Yacht Charters, Inc. lost market share to large national firms, and eventually closed down operations. Since it had no assets other than the goodwill of the business after all secured creditors were paid, there was nothing left to distribute to the shareholders. Assuming that there were no changes to Harry's ownership interest in Brittania Yacht Charters, Inc., and that Harry had no other capital transactions in the current tax year, what portion of Harry's loss on his investment in Brittania Yacht Charters can he deduct against ordinary income this year?$100,000 200k x 50% =100k which is his basis. MFJ can deduct the whole loss of the first $100kWally, a 45 year old professor, was speaking with his good friend, Larry, who is 53 years old. The topic of retirement savings comes up, and Larry told Wally that individuals age 50 and older could contribute $6,500 to an IRA. Wally did not review the laws for those older than 50 which indicates the deduction limit to be $5,500, but instead contributed $6,500 also. Assuming that Wally does not correct his error, what is the amount of the tax penalty that Wally must pay for making the $6,500 contribution for (the current tax year) to the IRA?$60 1000 x 6% excise tax = $60nontaxable rental activityrental activity in which the real estate is rented for less than 15 days per yearProfit motivean actual and honest, even though unreasonable or unrealistic, profit objective in engaging in an activityreserve methoda method of deduction bad debts used by some businesses in which bad debt deductions are taken based on a percentage of accounts receivable representing the historical percentage of accounts that go badspecific charge-off methodallows businesses to deduct bad debts as an ordinary loss in the year in which the debt becomes partially or wholly worthlessprimarily rental use activityrental activity in which the real estate is rented for 15 days or more per year and the owner's personal use of the property is less than the greater of 14 days per year or 10 percent of the rental daysmixed use rental activityrental activity in which the real estate is rented for 15 days or more per year and the owner's personal use of the property is more than the greater of 14 days per year or 10 percent of the rental dayshobby activityany activity that a taxpayer engages in without a profit motive. No deductions are permitted for hobbies after 2017net operating lossoccurs when trade or business activities generate higher expenses than income in a given year. After 2017, NOLs can generally only be carried forward and can only offset up to 80% of income for any one year.double basis rulea rule that applies to gifts and related party transactions where the transferee has a basis of the fair market value for losses and the transferor's basis for gains. The rule applies when the asset that is transferred has a fair market value less than the transferor's basis at the time of the transfer. This rule does not apply to arm's length unrelated party transactions. This rule may also be referred to as the split basis rule, dual basis rule, or bifurcated basis rule.