ch6tax1 - C6 - 1 Taxation of Business Entities Losses and...

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Unformatted text preview: C6 - 1 Taxation of Business Entities Losses and Loss Limitations Text: Chapter 6 C6 - 2 Outline Bad Debts Worthless Securities Casualty Losses NOL Deductions At-risk and Passive Loss Rules C6 - 3 Bad Debts-In General Bad Debt Deduction is allowed for: Bona-fide debts that are not repaid Unpaid accounts receivable for accrual-basis taxpayers Cash-basis taxpayers have not recognized income from the creation of an A/R; thus, these taxpayers can not deduct a bad debt expense C6 - 4 Specific Charge-Off Method Must be used by most taxpayers. Under the specific charge-off method, a deduction is allowed when: A business bad debt becomes wholly or partially worthless. A non-business bad debt becomes wholly worthless. Collection of a receivable previously written off bad debt requires recognition of income to the extent of the tax benefit from the previous write-off. C6 - 5 Business vs. Nonbusiness Debt Business bad debt Debt related to taxpayers trade or business Deductible as an ordinary loss Non-business bad debt Debt not related to the taxpayers trade or business Deductible as a short-term capital loss C6 - 6 Business vs. Nonbusiness Debt Example : A taxpayer (an individual) has ordinary income of $40,000, and a bad debt write-off of $10,000. What is the taxpayers AGI if bad debt is business bad debt? What is the taxpayers AGI if bad debt is non-business bad debt? What if the taxpayer was a C-Corporation instead of an individual? C6 - 7 Loans Between Related Parties Primary issue is whether the transaction was a bona fide loan or a gift. Factors determining loan vs. gift status Was a note properly executed? Was there a reasonable rate of interest? Was collateral provided? What collection efforts were made? What was the intent of the parties? C6 - 8 Worthless Securities Securities include stocks, bonds, and registered notes. Loss is allowed in tax year that securities become completely worthless. Losses are treated as capital losses deemed to have occurred on the last day of the tax year (regardless of the actual date of worthlessness). C6 - 9 Small Business Stock ( 1244) 1244 exception Ordinary loss treatment on sale (or worthlessness) of small business stock by individuals. Applies to first $1,000,000 of stock issued by corporation. Up to $50,000 per year ($100,000 for Married Filing Jointly) can be treated as ordinary loss. Only individuals who acquired the stock from the issuing corporation qualify. Example A single taxpayer sells 1244 stock in December 2009, with a basis of $110,000 for $40,000....
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ch6tax1 - C6 - 1 Taxation of Business Entities Losses and...

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