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PH8ky412 - CHAPTER 8 LOSSES AND BAD DEBTS Topics 1...

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CHAPTER 8 LOSSES AND BAD DEBTS
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Topics: 1. Transaction losses 2. Casualty and Theft losses 3. Bad Debts Transaction losses are deductible if realized —if an identifiable event occurs. The IRS classifies some transactions as “sales or exchanges.” Transactions classified as sales or exchanges result in deductible losses based on the type of asset involved in the transaction. Transactions not classified as sales or exchanges are always deductible as ordinary losses
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Business Use Investment Use Personal Use Sale or Exchange Sale or Exchange 1 Yes Yes Yes Type of loss Any Type Any Type None Dfor or Dfrom Dfor Rent or Royalty - Dfor None All others - Dfrom Expropriated, Seized, or Confiscated Sale or Exchange 1 Yes Yes Yes Type of loss Any Type Any Type None Dfor or Dfrom Dfor Rent or Royalty - Dfor None All others - Dfrom Abandoned Sale or Exchange No No No Type of loss Ordinary Ordinary None Dfor or Dfrom Dfor Rent or Royalty - Dfor None All others - Dfrom Worthless Securities 1,2 Sale or Exchange Yes Yes Yes Type of loss Capital Capital None Dfor or Dfrom Dfor Dfor None
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Business Use Investment Use Personal Use Demolition Sale or Exchange No No No Type of loss None None None Dfor or Dfrom None None None 1 §1231 assets and capital assets must be netted at year-end. 2 see §1244 Stock below.
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§1244 STOCK I. An ordinary loss is allowed up to $50,000 ($100,000 for married/joint returns) for losses on stock if the following conditions are met: A. THE STOCK-- 1. must be owned by an individual or partnership. 2. the individual or partnership must be the original owners. 3. must not have been issued in return for other stock or services. B. THE CORPORATION-- 1. must be a U.S. corporation. 2. gross receipts from passive income during last 5 years must be < 50% of total receipts. 3. only the first $1 million in capitalized value (par value plus paid-in capital in excess of par) qualifies. Example 1 --S is a bachelor. During the year, he sold stock in X Corporation that qualifies as §1244 stock at a loss of $70,000. In addition, S sold stock in Y Corporation, realizing a $4,000 long-term capital gain. Assuming a salary of $100,000 what is S's AGI?
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CASUALTY AND THEFT LOSSES I. Definition - A sudden , unexpected , or unusual loss (commonly referred to as "Acts of God" or "Acts of Nature"). Examples--fire, shipwreck, flood, automobile accident, theft. Remember, the burden of proof is on the taxpayer. Taxpayer must show that an identifiable event occurred aside from negligent or intentional behavior.
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