Ind. IO Chap. 8 - 2008

Ind. IO Chap. 8 - 2008 - Chapter I:8 Losses and Bad Debts...

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Chapter I:8 Losses and Bad Debts Learning Objectives After studying this chapter, the student should be able to 1. Identify transactions that may result in losses. 2. Determine the proper classification for losses. 3. Calculate the suspended loss from passive activities. 4. Identify what constitutes a passive activity loss. 5. Determine when a taxpayer has materially participated in a passive activity. 6. Identify and calculate the deduction for a casualty or theft loss. 7. Compute the deduction for a bad debt. 8. Compute a net operating loss deduction. Areas of Greater Significance The treatment of passive losses is relatively complex. Passive loss rules have greatly influenced the use of limited partnerships as an investment vehicle. The treatment of business bad debts for tax purposes can be dramatically different from financial reporting, with corresponding book to tax differences. Areas of Lesser Significance In the interest of time, the instructor may determine that the following area is best covered by student reading, rather than class discussion: 1. Compliance and procedural considerations. I:IO8-1
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The following areas may prove especially difficult for students: 1. Computation of passive losses and credits. 2. Computation of the deductible amount of casualty loss. 3. Computation of the net operating loss. Highlights of Recent Tax Law Changes There are no new tax law changes in this chapter as compared with the 2007 edition: Teaching Tips 1. Stress the importance of the difference between ordinary losses and capital losses. This will reinforce the necessity of learning the rules regarding gain and loss from disposition of capital assets. 2. The passive loss rules are very complex. You may want to summarize the important points you want the students to know for examination purposes. Lecture Outline I. Transactions that May Result in Losses (Example I:8-1; Topic Review I:8-1) Realization is a prerequisite for a tax loss. EXAMPLE: If a taxpayer holds stock that had a $25,000 fair market value at the beginning of the tax year and a $15,000 fair market value at the end of the tax, no loss is recognized for tax purposes, even though the value of the stock has decreased by $10,000. A. Sale or Exchange of Property (Example I:8-2) 1. In a sale or exchange, the amount of the loss is the excess of the property's adjusted basis over the amount realized. EXAMPLE: If the taxpayer realizes $10,000 from the sale of an asset with an adjusted basis of $18,000, the realized loss is $8,000 ($10,000 - $18,000). 2. Losses incurred on the sale of personal-use property are not deductible. 3. Losses on trade or business property and investment property are deductible. I:IO8-2
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Ind. IO Chap. 8 - 2008 - Chapter I:8 Losses and Bad Debts...

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