CCH Federal Taxation Comprehensive

Topics 2014 1st Edition Harmelink Test

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CCH Federal Taxation
Comprehensive Topics
2014

1. Practically all tax shelters were formed as limited partnerships.

*a. True
b. False

2. Portfolio income is interest, dividends, annuities, and royalties

derived in the ordinary course of a trade or business.

a. True
*b. False

3. The passive loss limitations apply to individuals, closely held

corporations, and personal service corporations, but not to estates and
trusts.

a. True
*b. False

4. A working interest which a taxpayer holds in oil and gas properties

is not subject to the passive activity rules.

*a. True
b. False

5. An individual is allowed to avoid the passive loss limitations for

all rental real estate activities in which the individual actively
participates.

*a. True
b. False

6. All casualty and theft losses are deductible if incurred in a trade

or business or in connection with an investment.

a. True
*b. False

7. A deduction resulting from the partial destruction of business

property is limited to the lesser of (1) the adjusted basis of the
casualty property, or (2) the decline in fair market value of the
casualty property.
 *a. True
b. False

8. If two or more net operating losses are carried back to a tax year,
they must be deducted in the order they were incurred.

*a. True
b. False

9. The deduction for hobby expenses is not subject to the two-percent

floor on miscellaneous itemized deductions.

a. True
*b. False

10. Exclusive use of a portion of a home for business purposes is

required to qualify for a business use of home deduction.

*a. True
b. False

11. An investor is not at risk for nonrecourse borrowings, stop-loss

arrangements, no-loss guarantees, or borrowings in which the lender has
an interest.

*a. True
b. False

12. The gain from the sale of property that produces portfolio income
(e.g., stocks and bonds) is classified as passive income.

a. True
*b. False

13. In determining whether a taxpayer materially participates, the

participation of a taxpayer's spouse will be taken into account.

*a. True
b. False

14. A business incurring a net operating loss in a taxable year can

carry the loss back two years and forward 15 years.

a. True
*b. False
15. In determining whether an activity is engaged in for profit, a
reasonable expectation of profit is required.

a. True
*b. False

16. Disaster area losses are carried forward for an additional five
years beyond ordinary casualty losses.

a. True
*b. False

17. Jim Jones had a deductible casualty loss of $10,000 on his 2013 tax
return. His taxable income was $112,000 in 2013. In September of 2014,
Jim is reimbursed $5,000 for the prior year's casualty loss. He should
include the $5,000 in gross income for 2014.

*a. True
b. False

18. When business property is completely destroyed, the loss is equal

to the difference between the fair market value of the property before
the event and the fair market value immediately after the event.

a. True
*b. False

19. Insurance proceeds received in the year of the casualty in a

business casualty loss do not reduce the amount of the loss.

a. True
*b. False

20. There are seven specific categories of domestic production gross

receipts that qualify for the qualified production activities income.

a. True
*b. False

21. The manufacturing deduction under Code Section 199 is only

available to C corporations and cooperatives.

a. True
*b. False

22. The Code Section 199 manufacturing deduction cannot exceed 50% of
W-2 wages paid by the taxpayer during a tax year.
 *a. True
b. False

23. A business NOL may be carried back three years and forward seven
years.

a. True
*b. False

24. The objective of the net operating loss deduction is to decrease

tax equity regarding the taxation of business income.

a. True
*b. False

25. Real estate investment trusts may carryback an NOL for two years
and forward for 20 years.

a. True
*b. False

26. Farmers may carryback an NOL for three years.

*a. True
b. False

27. Hobby expenses are generally deductible only to the extent of the
income generated by the activity.

*a. True
b. False

28. John Henderson purchased a condo on Hilton Head Island on January

4, 2013. He personally used the condo from May 7, 2013 until May 28,
2013. Because John rented the condo out for 112 days in 2013, he
qualifies to deduct all the available rental expenses.

a. True
*b. False

29. A theft loss is deductible in the year that the theft occurred.

a. True
*b. False
30. Suspended passive losses are carried forward for a maximum time
period of 20 years.

a. True
*b. False

31. Ann Jones uses a dry cleaning machine in her business, and it was
completely destroyed by fire. At the time of the fire, the adjusted
basis was $20,000 and its fair market value was $18,000. How much is
Ann's loss?

a. $18,000
b. $2,000
*c. $20,000
d. None of the above

32. Ann Jones uses a dry cleaning machine in her business, and it was
partially destroyed by fire. At the time of the fire, the adjusted
basis was $20,000 and its fair market value was $18,000. The adjusted
basis after the fire is $10,000 and the fair market value after the
casualty is $10,000. How much is the casualty loss?

a. $10,000
*b. $8,000
c. $18,000
d. $20,000

33. ABC, Inc. of Jasper, Georgia suffered a casualty loss of $150,000

in March 2013. This loss was caused by heavy rains that completely
flooded their factory. As a result of these rains, the President
declared North Georgia (including Jasper) a disaster area on March 23,
2013. In what year can ABC, Inc. elect to deduct the casualty loss?

a. 2013 or 2014
*b. 2012 or 2013
c. Only 2013
d. Only 2012

34. Which of the following is not a passive activity?

a. Owning a business and not materially participating

b. Having rental condos
c. Owning a limited partnership interest in a real estate limited
partnership
*d. Owning a working interest in oil and gas properties

35. All of the outstanding stock of a closely held C corporation is

owned equally by Evelyn Humo and Steve Bufusno. In 2013, the
corporation generates taxable income of $20,000 from its active
business activities. In addition, it earns $20,000 of interest from
investments and incurs a $40,000 loss from a passive activity. How much
income does the C corporation report for 2013?

a. $10,000 of portfolio income

b. $0
*c. $20,000 of portfolio income
d. None of the above

36. All of the outstanding stock of a closely held C corporation is

owned equally by Evelyn Humo and Steve Bufusno. In 2013, the
corporation generates taxable income of $20,000 from its active
business activities. In addition, it earns $20,000 of interest from
investments and incurs a $40,000 loss from a passive activity. How much
of a passive loss carryover does the corporation have?

*a. $20,000
b. $0
c. $40,000
d. None of the above

37. During 2013, Hugh Hughes reported the following income and loss:

Activity X($50,000)
Activity Y $20,000

Both Activity X and Activity Y are passive to Mr. Hughes. Hugh purchased Activity X
in 1987 and Activity Y in 1993. How much is the loss that Mr. Hughes may deduct in
2013?

a. $50,000
b. $30,000
c. $3,000
*d. $0

38. John Mapp dies with passive activity property having an adjusted
basis of $50,000, suspended losses of $20,000, and a fair market value
at the date of Mr. Mapp's death of $77,000. How much suspended loss can
be taken on Mr. Mapp's final Form 1040 return?

a. $20,000
b. $77,000
c. $7,000
*d. $0

39. John Mapp dies with passive activity property having an adjusted
basis of $50,000, suspended losses of $20,000, and a fair market value
at the date of Mr. Mapp's death of $60,000. How much suspended loss can
be taken on Mr. Mapp's final Form 1040 return?
 *a. $10,000
b. $20,000
c. $0
d. None of the above

40. Billy Ray owns several parcels of rental real estate, and he
actively participates in managing the properties. His total loss from
these activities in 2013 is $30,000. Assuming that his AGI for 2013 is
$110,000, what is the allowable deduction from these properties in
2013?

a. $0
b. $15,000
*c. $20,000
d. $30,000

41. Billy Ray owns several parcels of rental real estate, and he
actively participates in managing the properties. His total loss from
these activities in 2013 is $30,000 and his AGI for 2013 is $110,000.
How much of the disallowed loss from rental real estate activities may
be carried over to future years?

a. 0%
b. 10%
c. 50%
*d. 100%

42. Billy Ray owns several parcels of rental real estate, and he
actively participates in managing the properties. His total loss from
these activities in 2013 is $30,000 and his AGI for 2013 is $110,000.
For how many years may the disallowed loss be carried forward?

a. The disallowed loss may not be carried forward.

b. The disallowed loss may be carried forward for 15 years.
c. The disallowed loss may be carried forward for 15 years, but
only after it has been carried back for 3 years.
*d. The disallowed loss may be carried forward indefinitely.

43. The percentage of passive losses that may offset nonpassive income
for 2013 is:

*a. 0%
b. 10%
c. The percentage varies depending on the level of AGI.
d. 100%

44. Which of the following statements is correct?

a. Hobby expenses are always fully deductible.

 b. The financial status of the taxpayer is not considered in
determining whether activities are engaged in for profit.
c. The deduction for the allowed hobby expenses is an itemized
deduction, but not subject to the 2 percent floor.
*d. Hobby expenses that are deductible without reference to
whether they are incurred in an activity designed to produce
income, such as certain taxes, remain fully deductible.

45. Which of the following statements is incorrect?

a. A vacation home becomes a personal residence when its owner

uses it more than the greater of 14 days or 10 percent of the
number of rental days.
b. If a dwelling is classified as a personal residence, rental
losses are not deductible.
*c. If an individual rents out a vacation home for more than 14
days and does not use it excessively for personal purposes,
losses are allowed to be deducted from AGI.
d. If an individual actively participates in the rental real
estate activity, up to $25,000 of losses can be used to offset
nonpassive income.

46. John Hughes is in the business of truck farming (i.e., growing

tomatoes, bell peppers and green beans). During the year, one of his
barns was completely destroyed by fire. The adjusted basis of the barn
was $100,000. The fair market value of the barn before the fire was
$80,000. The barn was insured for 90% of its fair market value and John
recovered this amount under the insurance policy. John has adjusted
basis for the year of $60,000 (before considering the casualty).
Determine the amount of loss he can deduct on his tax return for the
current year.

a. $4,000
b. $24,000
*c. $28,000
d. $20,000

47. When a taxpayer incurs an NOL in 2013, that is not attributable to

a casualty or theft loss, the taxpayer may:

*a. Carry the NOL forward instead of back.

b. Carry the NOL back three years.
c. Carry the NOL back five years.
d. All of the above.

48. During 2013, Tommy’s home was burglarized. Tommy had the following
items stolen.
-A block of securities worth $20,000. Tommy purchased of securities
three years ago for $8,000.
-A block of securities worth $30,000. Tommy purchased the securities
for $24,000 two years ago.
Tommy’s homeowners policy had an $80,000 deductible clause for thefts.
How much is Tommy’s theft loss for 2013?

a. $50,000
*b. $32,000
c. $44,000
d. None of the above.

49. Which of the following is not a passive activity?

*a. Owning a working interest in oil and gas wells.

b. Owning a limited partnership interest in oil and gas wells.
c. Owning a limited partnership interest in real estate.
d. Owning a business and not materially participating.

50. Bill Goggans died and left passive activity property to his nephew,
Travis. Bill’s basis in the activity was $30,000, while Travis’ basis
was stepped up to $50,000. Suspended losses amounted to $22,000. How
much is the passive loss deduction that can offset nonpassive income?

a. $22,000
b. $30,000
*c. $2,000
d. None of the above.

51. Bob Mapp gave his daughter a limited partnership interest in a real
estate activity. Suspended losses amounted to $30,000. Bob’s adjusted
basis at the time of the gift was $40,000 ( fair market value was
greater than $40,000). What is the daughter’s basis in the property?

a. $40,000
b. $30,000
*c. $70,000
d. None of the above.

52. Net operating losses can be increased by which of the following?

a. Theft losses.
b. Business casualty losses.
c. Unreimbursed employee business expenses.
*d. All of the above.

53. The manufacturing deduction in 2013 is based on what percentage?

*a. 9%
b. 6%
c. 3%
d. None of the above.
54. Which of the following is not deductible?

a. NOLs
b. Expenses incurred for the production of income.
*c. Hobby expenses in excess of hobby income.
d. All of the above.

55. Steve Colburn’s portable sawmill used 100% for business, was
completely destroyed by fire. The sawmill had an adjusted basis of
$35,000 and a fair market value of $50,000 before the fire. The sawmill
was uninsured. Steve's casualty loss is:

a. $34,900
b. $50,000
c. $49,900
*d. $35,000

56. Tammy has the following items for the current year:

Nonbusiness capital gains $10,000

Nonbusiness capital losses (2,000)
Interest income 7,000
Itemized deductions (none of the amount realized from a casualty loss) (9,000)

In calculating Tammy's net operating loss, and with respect to the above amounts
only, what amount must be added back to taxable income (loss)?

*a. $0
b. $2,000
c. $3,000
d. $6,000

57. Jim owns four separate activities. He elects not to group them
together as a single activity under the “appropriate economic unit”
standard. Jim participates for 140 hours in Activity A, 130 hours in
Activity B, 140 hours in Activity C, and 100 hours in Activity D. He
has one employee who works 135 hours in Activity D. Which of the
following statements is correct?

a. Activities A, B, C, and D are all significant participation

activities.
b. Jim is a material participant with respect to Activities A, B,
C and D.
*c. Jim is a material participant with respect to Activities A, B
and C.
d. Losses from all of the activities can be used to offset Jim's
active income.
58. Fred’s at-risk amount in a passive activity is $50,000 at the
beginning of the current year. His current loss from the activity is
$60,000. He had no passive activity income during the year. At the end
of the year, which of the following statements is incorrect?

a. Fred has a loss of $50,000 suspended under the passive loss

rules.
b. Fred has an at-risk amount in the activity of $0.
c. Fred has a loss of $10,000 suspended under the at-risk rules.
*d. Fred has a loss of $60,000 suspended under the passive loss
rules.

59. Mike, who is single, has $100,000 of salary, $15,000 of income from
a limited partnership, and a $30,000 passive loss from a real estate
rental activity in which he actively participates. His modified
adjusted gross income is $100,000. Of the $30,000 loss, how much is
deductible?

*a. $30,000
b. $10,000
c. $25,000
d. $0

60. Which of the listed dispositions for a passive activity allow a

taxpayer to keep the suspended losses from the disposed activity and
utilize them on a subsequent taxable disposition?

a. Disposition of death.
b. Disposition by gift.
c. All of the above.
*d. None of the above.

61. During 2013, John Colburn, a single individual, reports the

following taxable income:

Gross income from business $200,150

Less: Business expenses 240,000 ($39,850)

Plus: Interest income 1,000

Dividend income 2,000
AGI ($36,850)

Less: Greater of itemized deductions or standard deduction

Casualty loss (reduced by $100 limit) $2,000
Taxes 3,000
Interest expense 3,000

Total itemized deductions $8,000

 or
Standard deduction $6,100 $ 8,000
Personal exemption 3,900

Taxable income $48,750

Compute John Colburn's net operating loss for 2013.

Correct Answer:
John's net operating loss for 2013 is $41,850, computed as follows:

Taxable income ($48,750)

Plus: Nonbusiness deduction:
Itemized deductions $8,000
Less: Casualty loss (2,000) $ 6,000

Less: Nonbusiness income:

Interest $1,000
Dividends 2,000 (3,000)

Excess of nonbusiness deductions over nonbusiness income 3,000

Plus: Personal exemption 3,900

John's net operating loss ($41,850)

62. On December 28, 2013, Alan Davis died with passive activity
property having an adjusted basis of $90,000, suspended losses of
$30,000 and a fair market value on the date of death of $125,000.
(a.) How much passive loss will Alan be allowed on his final Form 1040?
(b.) How would your answer change if the fair market value at date of
death was $100,000?

Correct Answer:
(a.) Alan will not be allowed any passive loss on his final Form 1040
because the fair market value of the property exceeded his adjusted
basis plus the suspended losses.
(b.) Alan would be allowed to deduct $20,000 of suspended losses on his
final Form 1040 because the losses are deductible to the extent they
exceed the amount of step-up in basis allowed.
63. Virgil Watson gave his daughter, Holly, a gift of passive activity
property. Suspended losses amounted to $30,000 and the property had an
adjusted basis of $40,000. Also, the property had a fair market value
of $75,000 at the time of the transfer. What is Holly's basis in the
property?

Correct Answer:
Holly's basis would be Mr. Watson's adjusted basis plus the amount of
suspended losses, or $70,000.

64. John Henry was a partner in a CPA firm with adjusted gross income
of $200,000 before consideration of income or loss from his farm
activities. His home is on 200 acres, 100 of which he uses to plant row
crops, 95 of which is timber, and the remaining five acres consist of
the house, barn, sheds, and a long driveway from the paved road to the
house.
John uses an office in his home that is 12 percent of the square
footage of the home. He uses this office only for farming activities.
John's records for 2013 are as follows:

Income from sales of crops $34,000

Expenses:
Seeds and plants purchased 9,800
Fertilizers and lime 3,200
Gasoline, fuel, and oil 1,400
Supplies 1,400
Wages of employee 9,200
Depreciation on farm equipment 5,000
Depreciation on 12% of home 2,400
Home mortgage interest 16,000
Property taxes on home 1,200
Farm publications 350

(a.) How must John Henry treat the income and expenses of the farm if
the activity is held to be a hobby?
(b.) How must John Henry treat the income and expense of the farm if
the farming operation is held to be a business?

Correct Answer:
(a.) John Henry would treat the income and expenses of the farm if the
activity is held to be a hobby as follows:

Income $34,000
Deduct:
Interest (12% of $16,000) $1,920
Taxes on farm 1,200
Taxes on home (12% of $1,600) 192 3,312

$30,688
Deduct other expenses:
Seeds and plants 9,800
Fertilizers and lime 3,200
Gasoline, fuel, and oil 1,400
Supplies 1,400
Wages 9,200
Farm publications 350 25,350

Remainder $ 5,338
Depreciation:
Farm equipment 5,000
Home 2,400

$ 7,400 limited to $ 5,338

Net income $0

The items are now handled as follows:

AGI $200,000

New AGI $234,000

Itemized deductions:
Interest and taxes on farm $ 3,312
Interest and taxes on home 15,488 $18,800

Other expenses:
($25,350 + $5,338) $30,688
Less: 2% of AGI 4,680 $ 26,008

The deductions for the farming operation were $29,320 ($3,312 + $26,008). Of
course, the $3,312 was deductible in any event. The net increase in taxable income
is as follows:

Farm income $34,000

Otherwise nondeductible expenses 26,008

Net increase in taxable income $7,992

(b.) If the activity is held to be a business, John Henry would be able to deduct
$2,062 for AGI as follows:

Remainder after other expenses (see calculation above)$5,338

Less: Depreciation 7,400

Deduction for AGI $2,062

Of course, John could deduct the remaining property taxes and interest of $15,488
as an itemized deduction.

65. In the current year, Sam Lett purchased a condominium in Hilton

Head Island, South Carolina. Sam and his family used the condominium
for a total of 30 days. The condominium was rented out a total of 70
days during the year, generating $9,000 of rental income. Sam incurred
the following expenses:

Property taxes $3,000

Mortgage interest 1,000
Insurance 1,000
Utilities 1,000
Depreciation 8,000

(a.) Determine Sam's deductible expenses using the IRS approach.

(b.) How much depreciation can be deducted in the current year if the
rental income was $12,000?
(c.) Does Sam have any options with regard to the interest and taxes?

Correct Answer:
(a.) IRS Approach

Income = $9,000
Interest and taxes $4,000 x(70/100) = (2,800)

Insurance and utilities 2,000 x(70/100) = (1,400)

Depreciation 8,000 x(70/100) =(5,600)*

*Limited to $4,800. Total expenses may not exceed rental income.

(b.) In this case, all the depreciation of $5,600 ($8,000 x 70/100)
could be deducted in the current year.
(c.) In addition to deducting the $2,800, Sam can deduct the remaining
$1,200 of interest and taxes as itemized deductions.

66. During the current year, Jack Goodwin, a married taxpayer who files
a joint return, reports the following items of income and loss: AGI,
consisting of salary income, of $130,000, and a rental real estate loss
of $40,000. Jack actively participates in the rental activity.
Determine Jack's AGI for the current year.

Correct Answer:
Jack has $120,000 in adjusted gross income, determined as follows:

Salary $130,000
Lesser of rental real estate loss ($40,000) or rental real estate
$25,000
exemption ($25,000)
Minus: Phaseout ($130,000 - $100,000) x .50 15,000

Deductible amount 10,000

Jack's AGI $120,000

67. In the current year, Bob Colburn's accounting office was partially
destroyed by a hurricane. Bob's adjusted basis in the building was
$300,000 and the decline in its fair market value was $200,000.
Insurance proceeds amounted to $160,000. Determine Bob's adjusted basis
in the property after the casualty.

Correct Answer:
Bob's adjusted basis in the property after the casualty is $100,000,
determined as follows:

Decline in FMV $200,000

Less: Insurance 160,000

Deductible loss $ 40,000

Adjusted basis before casualty $300,000

Less: Insurance 160,000
Deductible loss (40,000)
Bob's adjusted basis after casualty $100,000

68. Katelyn Jones owned interests in five limited partnerships in 2013.

Gains and losses are as follows for 2013:

PartnershipDate AcquiredAllocated Gain (Loss)

ABC 3/26/84 $10,000
DEF 5/19/86 (30,000)
JKL 11/13/88 ( 5,000)
QRS 1/08/89 ( 6,000)
XYZ 7/11/90 20,000

What is Katelyn's net passive loss for 2013? How much of the loss may
be deducted against active and portfolio income? How much of the loss
is a suspended loss?

Correct Answer:
Katelyn has a net passive loss of $11,000, determined as follows:

Pre-enactment Gains/LossesPost-enactment Gains/Losses

ABC $10,000
DEF (30,000)
JKL ($ 5,000)
QRS ( 6,000)
XYZ 20,000

($20,000) $9,000

Net pre-enactment loss ($20,000)

Net post-enactment gain 9,000

Net passive loss ($11,000)

In 2013, none of the loss can be used to offset active and portfolio
income. Thus, the entire $11,000 loss is a suspended loss.
Suspended losses for each activity are as follows:

DEF ($30,000/$41,000) x $11,000 = ($8,049)

JKL ($ 5,000/$41,000) x $11,000 = ($1,341)
QRS ($ 6,000/$41,000) x $11,000 = ($1,610)

Total ($11,000)

69. Jan Ellis has gross income of $140,000 in 2013 and owned the
following passive activities:

Activity2013 Gain (Loss)Suspended Loss

ABC $10,000 $ (4,000)
LMN 12,000 (25,000)
XYZ (23,000) (75,000)

All activities were acquired after 1986, and Jan was at risk for all
losses. She sold her interest in the LMN limited partnership in 2013.
The basis in the interest was $45,000, and the interest was sold for
$15,000. Explain all tax consequences pertaining to LMN for 2013.

Correct Answer:
The tax implications for the sale of LMN are as follows:

Selling Price $ 15,000

Adjusted Basis 45,000

Realized Loss $(30,000)

The $30,000 loss is a long-term capital loss. Also, the $25,000 of suspended losses
will offset the $12,000 gain from LMN, and the balance ($13,000) will be deductible
against active and portfolio income.

70. Judy Buessink owned an interest as a limited partner in LBJ

partnership. She did not materially participate in the activity. On the
date she gifted the LBJ partnership interest to her son, Alan, her
basis was $30,000. Suspended losses amounted to $25,000 as of that
date. What is Alan's adjusted basis on the gift?

Correct Answer:
None of the suspended losses are deductible, but Alan will have an
increased basis of $55,000:
Donor's adjusted basis$30,000
Suspended losses 25,000

Donee's basis $55,000

The donee's basis is determined by adding the suspended losses to the

donor's adjusted basis in the activity.

71. Your portable sawmill was completely destroyed by a fire and you
carried no insurance on the property. The adjusted basis for
depreciation of the sawmill building and equipment at the time of the
fire was $6,500, and its fair market value was $5,000. The value of the
equipment after the fire was only scrap value, amounting to $300.
(a.) What is your deductible casualty loss?
(b.) Assume that the sawmill was damaged by the fire but not completely
destroyed. Just before the fire the sawmill had a fair market value of
$5,000 and immediately after the fire its fair market value was $3,500.
Under these facts, what is your deductible casualty loss?

Correct Answer:
(a.) Your deductible casualty loss is $6,200, the adjusted basis of
$6,500 less salvage value of $300.
(b.) Your loss is limited to $1,500, the decrease in the fair market
value, since this amount is less than the adjusted basis of $6,500.

72. John Baron, a professional baseball player, raises Black Angus

cattle under circumstances that would indicate that the activity is a
hobby. His adjusted gross income for the year is $50,000, and he has
$500 of other miscellaneous itemized deductions, all of which are
subject to the two-percent floor. During the taxable year, he paid $300
in state taxes on real property used in the cattle operation. Feed for
the cattle cost $1,500. The income from the sale of cattle was $1,400.
(a.) Under the hobby loss rule, to what extent is the expense of $1,500
deductible?
(b.) Under the two-percent-of-adjusted-gross-income limitation, how
much is the overall deductible amount of his itemized deductions?

Correct Answer:
(a.) Under the hobby loss rule, the expense of $1,500 is deductible
only to the extent of $1,100 (gross income, $1,400, minus otherwise
allowable deduction, $300, = $1,100).
(b.) Under the two-percent-of-adjusted-gross-income limitation, the
$1,100 hobby loss deduction is aggregated with the other miscellaneous
itemized deductions ($500) and the deductible amount becomes $600
($50,000 x 2% = $1,000; $1,100 + $500 - $1,000 = $600).

73. Two taxpayers, Bob Ames and Alice Brown, each has gross income of
$66,000 and deductions of $77,000 in 2013.
A breakdown of Bob's and Alice's income and deductions is as follows:

Bob Alice
Business income $50,000$44,000
Business Deductions 63,000 50,000
Nonbusiness Income 16,000 22,000
Nonbusiness Deductions 14,000 27,000

Determine Bob's and Alice's NOLs for 2013.

Correct Answer:
Bob's and Alice's NOLs for 2013:
Bob Alice
Business Income $50,000 $44,000
Business Deductions 63,000 50,000

Net Business Loss ($13,000)($ 6,000)

Nonbusiness Income: $16,000 $22,000

Nonbusiness Deductions 14,000 27,000

Net Nonbusiness Income (Loss) (2,000) ($5,000)

Net Operating Loss ($11,000) ($6,000)

74. You own a building that you constructed on leased land. You use
half of the building for your business and you live in the other half.
The cost of the building was $400,000. You made no further improvements
or additions to it.
A fire in March damaged the entire building. The FMV of the building
was $380,000 immediately before the fire and $320,000 afterwards. Your
insurance company reimbursed you $40,000 for the fire damage.
Depreciation on the business part of the building before the fire
totaled $24,000. Your adjusted gross income for the year the fire
occurred is $125,000.
How much is your deductible business casualty loss in 2013?

Correct Answer:
Your deductible business casualty loss in 2013 is:
Business Part
1. Cost (total $400,000) $200,000
2. Subtract depreciation 24,000

3. Adjusted basis 176,000

4. FMV before the fire (total $380,000) 190,000
5. FMV after the fire (total $320,000) 160,000

6. Decrease in FMV (line 4 - line 5) 30,000

7. Loss (smaller of line 3 or line 6) $30,000

8. Subtract insurance 20,000

9. Loss after reimbursement $10,000

10. Deductible business loss $10,000