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Unformatted text preview: CHAPTER 7 CHAPTER 7 Business Expenses and Asset Losses
Skip Pages 1619 Business Expenses Business Expenses Bad Debts – Only Specific Chargeoff Method is Allowed – The Reserve for Allowances Method is NOT Allowed for Tax Purposes Business vs. NonBusiness Business vs. NonBusiness Bad Debts Business Bad Debt – Represents a Bad Debt generated in ordinary course of business – Includes Accounts/Notes/Loans Receivable Results in Ordinary Loss Treatment Partial losses are allowed for deduction NonBusiness Bad Debt (Uncollectible Loans) Generates Short Term Capital Loss Partial Losses (a % allowance) Not Allowed Related Party Loans Related Party Loans Does CreditorDebtor Relationship Exist? Circumstances, Intent, and Documentation are Critical to Support the Creditor Position Important Considerations Is there a Written Note Signed by both Parties? Is there a Reasonable Rate of Interest Stated? Is there Collateral? (not required) What were the Collection Efforts? What was the Intent of the Creditor? Worthless Securities Worthless Securities
Deemed completely worthless on Dec. 31 Subject to Capital Loss Rules Exception §1244 Stock (Small Business)
Allows for Ordinary Loss Treatment (up to $100,000 when MFJ; $50,000 if Unmarried) Requirements for issuing §1244 stock: 1) <$1 million of original capitalization 2) Shareholder must be original owner of stock 3) only individual ownership allowed Losses Available To Individuals Losses Available To Individuals Trade or Business (selfemployment) Investment Losses (Capital Assets)
Follows Capital Loss Rules Follows Business Rules – (Ordinary Expense) Casualty & Theft Losses (Personal Use Assets)
Fire, Storm, Theft, or, Damage that is: Sudden, Unexpected, or Unusual Does not include Erosion, Disease, Insect Damage, or Decline in Market Value Deduction Taken in Year of Loss or Year of Discovery unless loss was due to natural disaster Subsequent Reimbursement from a 3rd party is Income if Loss Was Deducted in a Prior Year Amount of Loss Recognized From Amount of Loss Recognized From Asset Loss or Destruction
If Asset was Business or Investment Property and there is a; Adjusted Basis of asset, or, Complete Loss, then A/B of Asset is recognized Partial Loss, then the recognized loss is Lesser of: Decline in FMV of Asset immediately after the event If Asset was Personal Use Property, then recognized loss is ALWAYS the lesser of: Adjusted Basis of the asset, or Decline in FMV of Asset immediately after the event, Reduced by $100 for each loss and 10% of AGI Personal Use Losses are Deductions FROM AGI INSURANCE PROCEEDS ALWAYS REDUCE RECOGNIZED LOSSES!!! Net Operating Losses Net Operating Losses Usually Results From a Trade or Business Activity The General Rule is to: Taxpayer may elect to forego the carry back if the Loss will provides a better tax benefit in future Refund Claim is made on Form 1045 or 1040X – Carry an NOL back 2 Years, and then, carry the remainder forward for up to 20 years ...
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- Fall '08