T11F-Chp-07-1-Losses-Deductions-and-Limits-2011

T11F-Chp-07-1-Losses-Deductions-and-Limits-2011 - Chapter 7...

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Chapter 7. Losses-Deductions and Limits- 2011 T11F-Chp-07-1-Losses-Deductions and Limits- 2011
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Part-1. Annual Losses Trade or Business, Rental Activities Part-2. Losses, Loss Carryovers NOL, Tax Shelters (Passive Losses) Part-3. Trade or Business Losses Operating losses, Business casualty or theft losses Part-4. Investment related losses Capital losses (individuals and corp), Small business stock, Related party losses, Wash sales Part-5. Losses on Personal use items (Casualties)
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Annual Losses Summary Net Op. Losses Acct Methods Shelters-Overview Net Op. Loss At-Risk Rules At-Risk limits Passive Activity Passive Losses Transaction Loss Casualty. Theft Trade or Bus Loss Invest.-Losses Investment Losses 1244 losses 7. Losses: Deductions, Limits.
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Definition of Losses Annual (Activity) Losses result when an entity’s deductions for the period exceed its income Transaction Losses result from the disposition of an asset
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Realized loss Annual loss Transaction loss Trade or business loss Trade or business loss Passive Activity NOL deduction Loss allowed or loss deduction suspended Ordinary loss Capital loss limitations Non- deductible Investment- related loss Personal use loss Figure 7-1 General Scheme for Treatment of Losses
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Annual Loss Trade or Bus. Rental Prop.
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Loss Carryovers NOL Shelter Losses At-Risk Passive Losses Active particpation
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Annual Losses: Net Operating Loss Incurred in trade or business operations Caused by business expenses May not be caused by investment or personal expenses Treatment No tax in year NOL occurs Carry-back 2 years (But consider 2009 law) Carry-forward unused NOL 20 years May elect to forego carry-back
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Owner of C Corp. has asked for advice. Corporation was started in 2010 Actual Actual Actual Plan Amounts ($000) 2010 2011 2012 2013 Revenue $100 $200 $200 $300 Expenses (98) (173) (225) (225) Taxable income (loss) $2 $27 ($25) $75 1. Can the corp. benefit from the loss in 2012? 2. Is there a choice regarding the 2012 loss? 3. Compute the savings under two options. 4. How do you apply present value methods here?
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Annual Losses: Tax Shelter Losses Dominant business purpose is lacking Primary motivation is tax reduction Are often vehicles for tax law abuse Tax shelters are activities designed to minimize the effect of tax on wealth accumulation.
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Building bought on 1/1/Yr 1 Cost 1/1/Yr-1 $400,000 Rental Mort 10% $400,000 Office Annual Deprec. Expense $10,000 Building Annual insurance & exp. $15,000 Value 1/1/Yr-1 $400,000 Value 12/31/Yr-1 $500,000 Rental income Per Year Charlotte Corporation $60,000
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Study the information given on the building on the preceding page. Assume the owner only pays interest on the mortgage. What is gain or loss on sale of the building, if it is sold on 1-1-Yr2, for $500,000? What happens to the taxable loss from Yr 1? We will also consider what happens if the value of the building declines over the period of ownership.
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T/P buys Rental Building on 1-1-Yr-1 Cost 1/1/Yr-1 $400,000 Mortgage 10% $400,000 Value of Build. 1/1/Yr-1 $400,000 Value of Build. 12/31/Yr-1 $500,000 Rent Revenue Depreciation Interest Expense Taxes,insurance Taxable Income (loss) Economically - Is there a loss?
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