Question

1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $17,000 in final settlement of the account. How much can James take as a bad debt deduction in the current year for this transaction:

a) $ 2000 (loss) b)0 c)$5000 d)$3000

2. Which of the following credits is considered “refundable”?

a.) Child and dependent care credit b.) Retirement plan contribution credit

c.) Child tax credit d.) Credit for elderly

3. Tax advantages of being self-employed (rather than being an employee) include:

a.) The overall limitation (50%) on meals does not apply. b.) An office in the home deduction (for AGI) is available.

c.) Job-related expenses are deductions for AGI. d.) Both b. and c. are advantages.

Answer 1

Solution

(1)

Answer: (b) 0

Explanation: James has bought the accounts receivable from Green Corporation for $ 15,000. As the receivables belong to Green Corporation, and James has just bought the same as an asset, there is no question of bad debt for James. However, as James has collected $ 17,000, he will record a gain of $ (17,000 - 15,000) = $ 2,000, but no bad debt deduction can be claimed.

(2)

Answer: (c) Child Tax Credit

Explanation: A tax credit is refundable if the taxpayer may claim a refund for some or all of the credit that is not needed to offset a tax liability. Refundable credits include the child tax credit; the American Opportunity Tax Credit, which is partially refundable; and the earned income credit. The child and dependent care credit, Retirement plan contribution credit, and Credit for elderly are nonrefundable tax credits.

(3)

Answer: (c) Job-related Expenses are deductions for AGI

Explanation: Job-related expenses are reported on Schedule C (rather than Schedule A) which results in deduction for AGI treatment.