q1

Tim loaned a friend $4,000 to buy a used car. In the current year, Tim's friend declares bankruptcy and the debt is considered totally worthless. What amount may Tim deduct on his individual income tax return for the current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year?

a. $4,000 ordinary loss

b. $2,000 short-term capital loss

c. $4,000 short-term capital loss

d. $3,000 ordinary loss

e. $3,000 short-term capital loss

q2

Jack is a lawyer who is a member at Ocean Spray Country Club where he spends $7,200 in dues, $4,000 in business meals, and $2,000 in green fees to entertain clients. He has separate invoices for the meals. He is also a member of the local Rotary club where he meets potential clients. The dues for the Rotary club are $1,200 a year. How much of the above expenses can Jack deduct as business expenses?

a. $4,200

b. $3,200

c. $7,200

d. $14,400

e. None of these choices are correct.

q3

Ellen loans Nicole $45,000 to start a hair salon. Unfortunately, the business fails in 2018 and she is unable to pay back Ellen. In 2018, Ellen also had $20,000 of income from her part-time job and $15,000 of capital gain from the sale of stock. How much of the $45,000 bad debt can Ellen claim as a capital loss in 2018?

a. $15,000, with $30,000 carried forward to 2019

b. $0

c. $35,000

d. $12,000, with $33,000 carried forward to 2019

e. $18,000, with $27,000 carried forward to 2019

q4

Martin has a home office for his business as an agent for rock-and-roll bands. The business shows a loss of $2,000 before home office expenses. How should the home office expenses be treated?

a. The home office expenses increase the business loss in the year they are incurred and are fully deductible in that year.

b. Because of the business loss, home office expenses (other than mortgage interest and property taxes allocated to the office) cannot be deducted in the current year but can be carried forward to the next year.

c. The home office expenses increase the business loss in the year they are incurred and are 50 percent deductible in that year.

d. Because of the business loss, home office expenses cannot be deducted and are lost forever.

q5

In determining whether an activity should be classified as a hobby, the tax law provides a rebuttable presumption with regard to the profits or losses of an activity. Which of the following statements describes the profit/loss test which must be satisfied in order to meet the presumption that the activity is not a hobby?

a. The activity shows a profit for 3 of the 7 previous years.

b. The activity shows a loss for 3 of the 7 previous years.

c. The activity shows a loss for 3 of the 5 previous years.

d. The activity shows a profit for 3 of the 5 previous years.

e. None of these choices are correct.

q6

In his spare time, Fred likes to restore old furniture and sell it to his friends. He is a lawyer by trade. During 2018, he sells $500 worth of furniture and has $21,000 worth of marketing and equipment rental expenses. Which one of the following is true?

a. Fred cannot deduct any of the expenses because he is engaged in a hobby.

b. Fred may deduct all $21,000 of his expenses because Fred is engaged in a hobby.

c. Fred may deduct all $21,000 of his expenses because Fred is engaged in a trade or business.

d. Fred's deductions are limited to the income from selling furniture because he is engaged in a hobby.

e. None of these choices are correct.

q7

2. Calculator

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   Generally, for an activity to be treated as a trade or business, which of the following is required:

   a. Always generate a profit

   b. Regular and continual effort designed to seek profit

   c. Organization as a corporation or partnership

   d. No more than intermittent effort toward the activity