Week4.Lecture.Chapters7and9

Week4.Lecture.Chapters7and9 - Chapters 7 and 9...

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Chapters 7 and 9 Deductions and Losses: Certain Business  Expenses and Losses and Employee  Expenses
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C7/9 - C7/9 - 2 Bad Debts TP sells goods or services on credit and the A/R later becomes worthless A bad debt deduction is permitted only if income arising from creation of the receivable was previously included in income No deduction is allowed if taxpayer is on the cash basis since no income is reported until the cash has been collected
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C7/9 - C7/9 - 3 Business Bad Debts (slide 1 of 4) Specific charge-off method must be used Exception: Reserve method is allowed for some financial institutions Deduct as ordinary loss in the year when debt is partially or wholly worthless
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C7/9 - C7/9 - 4 Business Bad Debts (slide 2 of 4) If a business debt previously deducted as partially worthless becomes totally worthless in a future year Only the remainder not previously deducted can be deducted in the future year
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C7/9 - C7/9 - 5 Business Bad Debts (slide 3 of 4) Measuring worthlessness: Deductible amount will be the “basis” of the debt If debt arose from sale of services or products and the face amount was previously included in income, basis = amt taken into income If the taxpayer purchased the debt, basis = amount taxpayer paid for debt instrument
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C7/9 - C7/9 - 6 Business Bad Debts (slide 4 of 4) If a receivable has been written off The collection of the receivable in a later tax year may result in income being recognized Income will result if the deduction yielded a tax benefit in the year it was taken
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C7/9 - C7/9 - 7 Nonbusiness/Personal Bad Debts Deduct as short-term capital loss in year amount of worthlessness is known with certainty Must be wholly worthlessness
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C7/9 - C7/9 - 8 Worthless Securities (slide 1 of 2) Loss on worthless securities is deductible in the year they become completely worthless These losses are capital losses deemed to have occurred on the last day of the year in which the securities became worthless
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C7/9 - C7/9 - 9 Worthless Securities (slide 2 of 2) Example of worthless securities On December 1, 2006, Sally purchased stock for $10,000. The stock became worthless on June 1, 2007. Sally’s loss is treated as having occurred on December 31, 2007. The result is a long-term capital loss.
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C7/9 - C7/9 - 10 10 Definition of Casualty & Theft (C & T) Losses or damages to the taxpayer’s property that arise from fire, storm, shipwreck, or other casualty or theft Loss is from event that is identifiable,
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