CHAPTER 7 DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES

1. Juanita, single and age 43, had the following items for 2014:

Salary	$60,000
Interest income	6,000
Casualty loss on business property	(15,000)
Casualty loss on rental property	(5,000)
Loss on theft of securities	(8,000)
Personal casualty gains	9,000
Personal casualty loss (after $100 floor)	(13,000)
Other itemized deductions	(9,000)

Compute Juanita’s taxable income for 2014.

2. While Susan was on vacation during the current year, someone broke into her home and stole the following items:

· A computer used 60% in connection with Susan’s employment as an employee and 40% for her personal use. The cost of the computer was $8,000. Depreciation of $3,000 had been taken on the computer and it had a fair market value of $4,000 at the time of the theft.

· A painting, which Susan purchased as an investment for $10,000, had a fair market value of $17,000.

· Silverware purchased for $3,000 had a fair market value of $5,000.

∙ Cash of $30,000.

Susan’s adjusted gross income, before considering any of the above items, is $60,000. Determine the total amount of Susan’s itemized deductions resulting from the theft.

3. Neal, single and age 37, has the following items for 2014:

Salary $50,000

Casualty loss on business property (8,000)

Casualty loss on rental property (5,000)

Personal casualty gains 3,000

Personal casualty losses (after $100 floor) (12,000)

Interest expense on personal residence (7,000)

Determine Neal’s taxable income for 2014.

4. Gary, who is an employee of Red Corporation, has the following items for 2014:

Salary	$80,000
Personal casualty gain	7,000
Personal casualty loss from one event (before the $100 floor)	15,000
Loss on rental property	6,000
Theft of bearer bonds	18,000
Unreimbursed loss from theft of a computer used 100% for business	4,000
Determine Gary’s AGI and total amount of itemized deductions for 2014.

5. Susan has the following items for 2014:

· Loss on rental property caused by termites—$110,000. Insurance covered 80% of the loss.

· Loss on personal use automobile—$10,000. The insurance policy does not cover the first $3,000 of loss. Susan decided not to file a claim for the loss.

· Loss on a painting stolen from Susan’s house. Susan purchased the painting three years ago as an investment. She paid $40,000 for the painting and it was worth $35,000 at the time of the theft. The painting was insured for the fair market value.

· Salary—$40,000.

Determine Susan’s AGI and total amount of itemized deductions for 2014.

6. Roger, an individual, owns a proprietorship called Green Thing. For the year 2014, Roger has the following items:

· Business income—$200,000.

· Business expense—$150,000.

· Loss on a completely destroyed business machine. The machine had an adjusted basis of $25,000 and a fair market value of $20,000.

· Loss on a business truck. The truck had an adjusted basis of $8,000. The repairs to fix the truck cost $10,000.

Determine Roger’s adjusted gross income for 2014.

7. In 2013, Robin Corporation incurred the following expenditures in connection with the development of a new product:

Salaries	$100,000
Supplies	40,000
Market survey	10,000
Depreciation	25,000

In 2014, Robin incurred the following additional expenditures in connection with the development of the product:

Salaries	$125,000
Supplies	50,000
Depreciation	30,000
Advertising	10,000

In October 2014, Robin began receiving benefits from the project. If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction.

8. In 2014, Tan Corporation incurred the following expenditures in connection with the development of a new product:

Salaries	$ 60,000
Supplies	20,000
Depreciation on research equipment	10,000
Testing for quality control	5,000
Advertising	8,000
Overhead allocated to research	2,000

Tan began selling the product in November 2014. If Tan elects to amortize research and experimental expenditures, determine Tan’s deduction for 2014.

9. Green, Inc., manufactures and sells widgets. During 2014, an examination of the company records showed the following items:

Domestic production gross receipts	$3,000,000
Cost of goods sold for domestic products	750,000
Expenses directly related to domestic production gross receipts (other than wages)	300,000
W-2 wages paid to employees engaged in qualified domestic production activities	300,000
Ratable portion of other expenses	100,000
Total W-2 wages	325,000
Taxable income	1,600,000

Determine Green’s domestic production activities deduction for 2014.

10.Red Company is a proprietorship owned by Sally, a single individual. Red manufactures and sells widgets. During 2014, an examination of Red’s records shows the following items:

Domestic production gross receipts	$2,500,000
Cost of goods sold for domestic products	600,000
Expenses directly related to domestic production gross receipts (other than wages)	280,000
Ratable portion of other expenses	100,000
Other expenses not allocated to domestic production gross receipts	30,000
W-2 wages paid to employees engaged in qualified domestic production activities	270,000
Total W-2 wages	320,000
Sally also had the following additional items:
Dividends received	$ 20,000
Interest income	10,000

Determine Sally’s domestic production activities deduction for 2014.

11.Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.