Ch07 - Chapter 7 Deductions: Business/Investment Losses and...

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Chapter 7 Deductions: Business/Investment Losses and Passive Activity Losses ©2011 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com
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Chapter 7 Exhibits 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 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 CCH Federal Taxation Basic Principles 2 of 31 Chapter 7, Exhibit Contents A
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Chapter 7 Exhibits 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 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 CCH Federal Taxation Basic Principles 3 of 31 Chapter 7, Exhibit Contents B
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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, 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. CCH Federal Taxation Basic Principles 4 of 31 Chapter 7, Exhibit 1a Abusive Tax Shelters
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Example of Pre-1987 Tax Shelter 10 investors form "Pay-No-Tax," a limited partnership. Each investor contributes $10,000, and the partnership purchases an office building. The building never exceeds 50% occupancy. CCH Federal Taxation Basic Principles 5 of 31 Chapter 7, Exhibit 1b Abusive Tax Shelters
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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) 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% CCH Federal Taxation Basic Principles 6 of 31 Abusive Tax Shelters Chapter 7, Exhibit 1c
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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. Compared to the $112,000 tax savings, the partnership actually had a positive cash flow of $52,000. ($112,000 - $60,000)
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This note was uploaded on 01/14/2012 for the course ACCT 101 taught by Professor Smith during the Spring '11 term at UT Arlington.

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Ch07 - Chapter 7 Deductions: Business/Investment Losses and...

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