Tax 802 Ch. 12 Lecture Notes

Tax 802 Ch. 12 Lecture Notes - 1Chapter 12 DEDUCTIONS FOR...

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Unformatted text preview: 1Chapter 12 DEDUCTIONS FOR CERTAIN INVESTMENT EXPENSES AND LOSSES LECTURE OUTLINE I. At-risk rules A. General rules 1. Taxpayers are entitled to deduct losses only to the extent they are at-risk a. Unused losses are suspended until the taxpayer has increased the at-risk amount 2. Rules apply to all activities considered a trade or business or income producing. a. The rules do not apply at the partnership or corporate level but rather at the partner or shareholder level b. Apply on an activity by activity basis; activities may be aggregated 3. In determining the amount of loss that is deductible from a flow through entity, the loss is limited as follows: a. Basis of partnership interest or basis of S corporation stock b. At-risk limitations c. Passive loss rules 4. Amounts considered at-risk a. Sum of money, provided that the cash was not borrowed by the taxpayer from a relative, an entity controlled by the taxpayer, or a party having an interest in the activity other than as a creditor (Prop. Reg. § 1.465-22) b. The adjusted basis of other property contributed to the corporation but only to the extent that property is not secured by a nonrecourse debt [Prop. Reg. § 1.465-23, -25] c. S shareholders include debt owed to shareholder but not any portion of corporate debt to other parties d. Partners include amounts borrowed by the partnership for which they are personally liable (i.e. recourse debt) e. Increased for income and decreased for losses and distributions. B. Computation of at-risk amount 1. Formula 12-2 Deductions for Certain Investment Expenses and Losses Beginning at-risk balance + Contributions of cash and property (adjusted basis) + Increases in recourse debt (taxpayer is personally liable and the lender has no interest in the venture) + Increases in debt for which the taxpayer has pledged property which is not used in the activity as security + Increases in qualified nonrecourse debt related to realty + Income (taxable and tax-exempt)- Cash or property withdrawals or distributions- Nondeductible expenses related to tax-exempt income- Decreases in qualified nonrecourse debt related to realty- Decreases in recourse debt (T/P personally liable)- Losses = Amount at-risk 2. Nonrecourse debt is generally not included in at-risk amount unless it is qualified nonrecourse financing a. The financing is secured by the real property used in the business b. No persona is personally liable for the debt c. Amounts are borrowed from a qualified person or from the government 3. Qualified person includes any person which is actively and regularly engaged in the business of lending money and is not either a. Related to the taxpayer under Sec. 267(b) or Sec. 707(b) (substituting 10 percent for 50 in these sections); however, this rule does not apply if the financing is commercially reasonable b. A person from which the taxpayer acquired the property c. A person who receives a fee for the taxpayer's investment II. Passive activity limitations: Section 469.Passive activity limitations: Section 469....
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Tax 802 Ch. 12 Lecture Notes - 1Chapter 12 DEDUCTIONS FOR...

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