CHAPTER 7 DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES

1. 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 insurance recovery of 70% of the value of the car at the time of the accident. If Jim’s AGI for the year is $60,000, determine his deductible loss on the car.

a. $900.

b. $2,900.

c. $3,000.

d. $9,000.

e. None of the above.

2. 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 insurance policy. Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates. His adjusted gross income was $14,000 (before considering the loss). What is Norm’s deductible loss?

a. $0.

b. $100.

c. $500.

d. $9,500.

e. None of the above.

3. 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 data with respect to the residence follows:

Cost basis $280,000

Value before casualty 250,000

Value after casualty –0–

What is Grant’s allowable casualty loss deduction?

a. $0.

b. $6,500.

c. $6,900.

d. $10,000.

e. $80,000.

4. John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows:

Cost basis	$260,000
Value before the fire	400,000
Value after the fire	100,000
Insurance recovery	270,000

John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:

Cost basis	$80,000
Value before the accident	56,000
Value after the accident	20,000
Insurance recovery	18,000

What is John’s itemized casualty loss deduction?

a. $0.

b. $2,000.

c. $17,000.

d. $18,000.

e. None of the above.

5. In 2014, Mary had the following items:

Salary	$30,000
Personal use casualty gain	10,000
Personal use casualty loss (after $100 floor)	17,000
Other itemized deductions	4,000

Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2014.

a. $13,000.

b. $14,100.

c. $14,300.

d. $22,000.

e. None of the above.

6. In 2014, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:

Loss from damage to rental property	($6,000)
Loss from theft of bonds	(3,000)
Personal casualty gain	4,000
Personal casualty loss (after $100 floor)	(9,000)

Determine the amount of Morley’s itemized deduction from the losses.

a. $0.

b. $2,900.

c. $5,120.

d. $5,600.

e. None of the above.

7. In 2014, Theo, an employee, had a salary of $30,000 and experienced the following losses:

Loss from damage to rental property	($10,000)
Unreimbursed loss from theft of business computer	(5,000)
Personal casualty gain	4,000
Personal casualty loss (after $100 floor)	(9,000)

Determine the amount of Theo’s itemized deduction from these losses.

a. $0.

b. $2,800.

c. $2,900.

d. $4,580.

e. None of the above.

8. Alicia was involved in an automobile accident in 2014. Her car was used 60% for business and 40% for personal use. The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If Alicia’s AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss.

a. $4,500.

b. $6,100.

c. $8,000.

d. $24,000.

e. None of the above.

9. In 2013, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah’s insurance company told her that her policy did not cover the theft. Sarah’s other itemized deductions last year were $2,000. She had AGI of $30,000 last year. In August of 2014, Sarah’s insurance company decided that Sarah’s policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during 2014.

a. None of the $5,000 should be included in gross income.

b. $2,900 should be included in gross income.

c. $5,000 should be included in gross income.

d. Last year’s return should be amended to include the $5,000.

e. None of the above.

10.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 fair market value, and Alma recovered this amount under the insurance policy. Alma has adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year.

a. $3,750.

b. $14,650.

c. $14,750.

d. $18,750.

e. None of the above.