ch 7 powerpoint - Chapter 7 Deductions: Business/Investment...

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1 Chapter 7 Deductions: Business/Investment Losses and Passive Activity Losses ©2011 CCH. Al Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com 1. Abusive Tax Shelters 2. At-Risk Rules 3. Determining the Amount at Risk 4. Additional Points on At-Risk Rules 5. Passive Activity Loss Rules Chapter 7 Exhibits CCH Federal Taxation Comprehensive Topics 2 of 31 6. Applying the At-Risk and Passive Loss Rules 7. Disposing of an Entire Passive Activity Interest 8. Inheriting a Passive Activity 9. Receiving a Passive Activity as a Gift 10. Material Participation Chapter 7, Exhibit Contents A 11. Significant Participation 12. 6 Exceptions to Rental Activity Status 13. Special $25,000 Allowance 14. Real Estate Professionals 15. Computing Business Casualty and Theft Losses 16NO i L Rl f Id ii d l Chapter 7 Exhibits CCH Federal Taxation Comprehensive Topics 3 of 31 16. Net Operating Losses—Rules for Individuals 17. Hobby Losses 18. Home Office Expenses 19. Vacation Home Expenses 20. Rented for More Than 14 Days Chapter 7, Exhibit Contents B
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2 Tax shelters provided deductions to investors in order to reduce tax liabilities with respect to income from other sources. Almost all tax shelters were formed as limited partnerships, Abusive Tax Shelters CCH Federal Taxation Comprehensive Topics 4 of 31 which allowed losses to pass through to the individual’s tax return. (A limited partner is not personally liable for the debts of the partnership). Typical tax shelters once provided high returns without necessarily making a before-tax profit. Chapter 7, Exhibit 1a Example of Pre-1987 Tax Shelter 10 investors form "Pay-No-Tax," a limited partnership. Abusive Tax Shelters CCH Federal Taxation Comprehensive Topics 5 of 31 Each investor contributes $10,000, and the partnership purchases an office building. The building never exceeds 50% occupancy. Chapter 7, Exhibit 1b Abusive Tax Shelters At 50% occupancy, the annual cash flows appear as follows: Description LP Each of the 10 Partners Rental income $ 70,000 $ 7,000 Operating expenses (40,000) (4,000) Interest payments (90,000) (9,000) Negative cash flow (60 000) (6 000) CCH Federal Taxation Comprehensive Topics 6 of 31 (60,000) (6,000) Depreciation (100,000) (10,000) Tax loss (160,000) (16,000) Tax benefit from loss (70% tax bracket from 1965 – 1981) 112,000 11,200 Net cash [($60,000) + $112,000] $52,000 $ 5,200 Annual return on equity ($52,000/$100,000) 52% 52% Chapter 7, Exhibit 1c
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3 The partnership had a $160,000 tax loss, which provided $112,000 of tax savings. ($160,000 * 70%) The partnership only had a $60,000 cash loss. Abusive Tax Shelters CCH Federal Taxation Comprehensive Topics 7 of 31 Compared to the $112,000 tax savings, the partnership actually had a positive cash flow of $52,000. ($112,000 - $60,000) Chapter 7, Exhibit 1d Congress passed the Code Sec. 465 at-risk rules in 1976. However, the at-risk rules did very little to curb abusive tax shelters. At-Risk Rules—Background CCH Federal Taxation Comprehensive Topics 8 of 31 The at-risk rules prevent taxpayers from deducting losses in excess of basis (i.e., amount at-risk ).
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This note was uploaded on 12/02/2011 for the course ACCOUNTING 4001 taught by Professor Nathanielbell during the Spring '11 term at FIU.

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ch 7 powerpoint - Chapter 7 Deductions: Business/Investment...

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