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chapter 7 handout - Individual Tax Accounting Planning...

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Individual Tax Accounting & Planning Chapter 7 – Lecture Examples Bad Debts A bad debt deduction is permitted only if income arising from the creation of the accounts receivable was previously included in income. Tax Benefit Rule. Specific Charge-off Method Business accounts receivable Non-business accounts receivable When recognized: May write-off when wholly or partially worthless When recognized: May write-off only when wholly worthless Amount of deduction: Basis of accounts receivable Amount of deduction: Basis of accounts receivable Character: Ordinary loss (no limitations) Character: Short-term capital loss subject to $3,000/year limitation Facts: 2008: Loan made for $2,000 2009: Borrower declared bankruptcy; it was estimated that creditors might recover $0.40/$1.00 2010: Creditors received $0.45/$1.00 How much is the deduction, when can it be recognized on the tax return and what is the character? Business Personal 2008: 2008: 2009: 2009: 2010: 2010: 1
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Individual Tax Accounting & Planning Chapter 7 – Lecture Examples 2
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Individual Tax Accounting & Planning Chapter 7 – Lecture Examples Worthless Securities A loss is allowed for securities that become completely worthless during the year or that are sold at a loss during the year. The amount of the deduction equals the taxpayer’s basis in the security less proceeds received upon sale, if applicable. The character of the deduction depends upon whether the security qualifies as a Small Business Stock subject to the benefits of IRC 1244. The benefits of IRC 1244 apply only to individuals who purchased stock directly from a corporation, which, upon issuance, generated less than $1.0 million in additional paid in capital: Not Small Business Stock Small Business Stock Character: Capital; consideration of long-term vs. short-term treatment is determined as if the security became worthless on the last day of the tax year. These capital losses are subject to the $3,000/year limitation.
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