Tax Ch 7 Essay

7551 words - 31 pages

CHAPTER 7

DEDUCTIONS AND LOSSES: CERTAIN
BUSINESS EXPENSES AND LOSSES
SOLUTIONS TO PROBLEM MATERIALS

| | | | Status: | Q/P |
Question/ | Learning | | | Present | in Prior |
Problem | Objective | Topic | | Edition | Edition |
| | | | | | | | |
1 | LO 1 | Bad debts: accounts receivable | | New | |
2 | LO 1 | Bad debts: basis | | Unchanged | 2 |
3 | LO 1 | Bad debts: worthlessness | | Unchanged | 3 |
4 | LO 1 | Bad debts: recovery | | Modified | 4 |
5 | LO 1 | ...view middle of the document...

|

| | | | Status: | | Q/P |
Research | | | | Present | | in Prior |
Problem | | Topic | | Edition | | Edition |
| | | | | |
1 | | Bad debts | | Unchanged | 1 |
2 | | Net operating loss | | Unchanged | 2 |
3 | | Casualty or theft loss | | Unchanged | 3 |
4 | | Casualty loss deduction | | New | |
5 | | Casualty loss deduction | | Unchanged | 5 |
6 | | Internet activity | | Unchanged | 6 |
7 | | Internet activity | | Unchanged | 7 |
|

CHECK FIGURES

32.33.34.35.36.37.38.39.40.41.a.41.b.42.43.44.45.46.47.a.47.b.48.a.48.b. | In the year of completeworthlessness.Include $7,000 in gross income.$5,000 bad debt deduction.$17,000.Mary should sell half each year.$53,000 AGI, $33,940 deduction.$60,000 loss should be taken currently.AGI of $75,000; $37,400 itemizeddeduction.Net cash benefit of $7,800 of filingan insurance claim.2012 $619,000; 2013 $703,000;2014 $0.2012 $0; 2013 $0; 2014 $132,198.$30,000.$49,500.$90,000.$5 ($6 – $1).$200,000.($13,750).No NOL.($46,400).NOL of $35,000. | 49.a.49.b.49.c.50.a.50.b.50.c.50.d.51.a.51.b.52.a.52.b.52.c.53.54.a.54.b.54.c.55.a.55.b.56.57.58.59.60.61. | $33,000.$0.$3,900.($85,600).$75,000.$75,000.Back 5 years and forward 20 years.$0.$62,725.($83,600).($70,000).($50,000).$4,450.($24,500).No NOL.$16,900 NOL carryforward.NOL of $19,000.2-year carryback.$48,000.$55,000.Taxable income ($17,000); NOL$0.$79,900.Refund due for 2011 $1,142.Refund due for 2012 $2,130. |


DISCUSSION QUESTIONS
1. An account receivable can give rise to a bad debt deduction if income arising from the creation of the account receivable was previously included in gross income. p. 7-3
2. Mike’s basis in the receivable would be the $7,000 ($10,000 × 70%) he paid for the receivable. Therefore, if he collects $6,000, he will have a bad debt of $1,000 ($7,000 – $6,000). p. 7-4
3. A loss is deductible only in the year of total worthlessness for a nonbusiness bad debt and is classified as a short-term capital loss. pp. 7-4 and 7-5
4. Jane must include the $5,000 in gross income of the current tax year, but only to the extent of the tax benefit in the previous year. Because Jane had capital gains of $2,000 in the previous year, the $50,000 bad debt could be used to the extent of $5,000 ($2,000 + $3,000) last year. Hence, Jane would have to include the $5,000 received in gross income in the current year. p. 7-4
5. The non-collection of an account would be considered a business bad debt. As such, it would be deducted as an ordinary loss in the year incurred. A business bad debt can be deducted based on either partial worthlessness or complete worthlessness. However, the amount of the deduction is limited to Bob’s basis in the account (what he paid for the account), not its face value. ...

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