413sol7-04 - Chapter 7: Losses - Deductions and Limitations...

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Chapter 7: Losses - Deductions and Limitations 7-1 ___________________________________________________________________ CHAPTER 7 LOSSES - DEDUCTIONS AND LIMITATIONS ___________________________________________________________________ DISCUSSION QUESTIONS 1. How are deductions and losses different? How are they similar? Explain. Differences - The main difference is that most deductions are for current expenditures and amortization of capital expenditures, whereas losses result from either an excess of deductions over income (annual loss) or an excess of basis over the amount realized on the disposition of an asset (transaction loss). Similarities - Both deductions and losses represent amounts invested to produce income and are reductions in taxable income under the ability-to-pay concept. In addition, the general approach to the deductibility of losses is similar to the approach taken for deductions. That is, tax relief is the result of legislative grace and any deductions allowed must be specified in the tax law. The categorization of losses by those incurred in a trade or business, production of income losses, and personal use losses is identical to the approach for deductions. The limitation on losses is similar to the limitations placed on deductions within each category. 2. Discuss the basic differences between annual losses and transaction losses. Annual losses result from an excess of deductions over income for a single accounting period. Thus, they represent the effect of all the transactions affecting an entity during the accounting period. Transaction losses result when the amount realized from a sale or other disposition of property is less than the basis of the property. That is, a transaction loss represents an incomplete capital recovery on a single transaction by an entity. 3. What are the net operating loss carryback and carryforward periods? Does a taxpayer have a choice of the years to which a net operating loss can be carried? Explain. A net operating loss can be carried back 2 years to obtain a refund of taxes paid. The loss must be carried to the earliest year in the carryback period first. If the loss is not entirely used up in the earliest year, the previous year is then used. If the entire loss is not used up during the 2-year carryback, any remaining loss can be carried forward for 20 years. A taxpayer may elect not to carryback any of the loss and only use the carryforward period. Note: For net operating losses (NOL’s) arising in 2001 and 2002, the two-year carryback period is increased to five years. For each year, a taxpayer can make an irrevocable election to waive the five-year period and use the existing two-year carryback period. In addition, as under prior law, a taxpayer can elect not to carryback the loss and carry forward the loss for twenty years.
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This note was uploaded on 02/08/2012 for the course MGMT BA 413 taught by Professor Lindamittermaier during the Spring '04 term at Capital University.

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413sol7-04 - Chapter 7: Losses - Deductions and Limitations...

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