$1.$ Some years ago, Jerry Jones, who is in the lending business, loaned Sarah Mosses $$30,000$ to purchase an automobile to be used for personal purposes. In August of the current year, Sarah filed for bankruptcy after she had paid back $$10,000$ of the loan to Jerry. Jerry was notified by the bankruptcy court that he could not expect to receive more than an additional $$4,000.$ Please respond to the questions below.

Read IRS Tax Topic # $453$ Bad Debt Deduction for more specific information. Also see, IRS Publications $550$ and $535$ at IRS.gov.

What amount, if any, may Jerry deduct in the current year as a business bad debt expense? Please show any calculations and explain.

$ $16,000$

$30,000$ Original Loan

$-10,000$ Amount Paid Back

$-4000$ Expected from Court

$$16,000$

Jerry would be able to write off $$16,000$ as a business bad debt expense.

$2.$ Mary, who is single, and lives in south Florida, suffered damage to her house and car during a flood in a federally declared disaster area. Her house, in which she had a basis of $$150,000,$ had a FMV of $$300,000$ before the flood damage, and a FMV of $$100,000$ after the flood damage. Mary paid $$30,000$ for her car; the insurance adjuster said it was worth $$20,000$ before the flood and that the car was $$totaled$.$ The insurance company paid her $$125,000$ for the damage to her house, and $70\%$ of FMV for her car. Before considering the casualty losses, Mary$$s current year AGI is $$180,000$ with TI of $$80,000,$ which puts her in the $22\%$ marginal tax bracket. Her prior year AGI was $175,000,$ with TI of $$160,000,$ which put her in the $24\%$ tax bracket. Mary itemized deductions in both year.

Current Prior

Year Year

$(2022)(2021)$

$2$a$.$ What would be the amount of Mary$$s casualty loss on schedule A for

the prior and current? $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$2$b$.$ What would be the amount of tax savings from this casualty loss on

Mary$$s income tax liability if she took the casualty deduction

in the prior and current year? $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$3.$ Heart Mountain Enterprises suffered a business casualty loss when a large machine was swallowed up by an earth quake. Cameras caught the machine being crushed, then disappearing into a great abyss. It was never seen again. The machine had an adjusted basis of $$1,650,000.$ It$$s FMV was $$1,500,000.$ Determine the deductible business casualty loss for Heart Mountain Enterprises. Insurance paid $$1,000,000.$

What is the deductible business loss for this casualty? $$650,000$

$1650000$ Value Before Market Value

$1000000$ Insurance Payment

$$650,000$ Deductible

Due to the Equipment being a total loss, the deduction would be $$650,000$ due to the fact that it is the lesser of the two values. If you were to use the FMV it would be the whole $$1,500,000.$ This means that after the earthquake, the equipment would have an FMV of $$0.$