Ch7 - 2015

7/25/2019 Ch7 - 2015

1/54

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.

Comprehensive Volume

1

Chapter !

"eductions and Losses#Certain $usiness %&pensesand Losses

7/25/2019 Ch7 - 2015

2/54

2

'he $ig (icture )slide 1 o* +

- Martha is nearing the end o* a year that she ould lie to*orget.

- /everal years ago she loaned a *riend 25,000 to enable hi tostart a business.

'he *riend had ade scheduled payents o* !,000 )1,000 o* this asinterest hen he une&pectedly died in 3anuary.- At the tie o* his death, he as insolvent.

Martha4s attepts to collect on the debt ere *ruitless.

- Last ctober Martha invested 50,000 in the stoc o* apharaceutical copany that previously had been pro*itable.

'he copany lost a patent in*ringeent suit and declared banruptcyin May o* this year.

Martha is noti*ied by the banruptcy trustee that she can e&pect toreceive nothing *ro the copany.

7/25/2019 Ch7 - 2015

3/54

3

'he $ig (icture )slide 2 o* +

- Martha has oned and operated a boostore as a soleproprietorship *or the past 10 years. 'he boostore previously has produced annual pro*its o*

about !5,000.

"ue to a chain boostore opening don the street, Martha4sboostore sustained a net loss o* 160,000 this year.

- 7n /epteber, a hurricane caused a large oa tree toblo over onto Martha4s house.

'he cost o* reoving the tree and aing repairs as+2,000. Martha received a chec *or 25,000 *ro her insurance

copany in *inal settleent o* the clai. 8er ad9usted basis *or the house as 260,000.

7/25/2019 Ch7 - 2015

4/54

4

'he $ig (icture )slide + o* +

- :inally, Martha purchased hat she believes to be

; 12 Read the chapter and *orulate your response.

7/25/2019 Ch7 - 2015

5/54

5

$ad "ebts

- 7* an account receivable arising *ro credit

sale o* goods or services becoes orthless

A bad debt deduction is peritted only i* incoe

arising *ro creation o* the receivable as

previously included in incoe

?o deduction is alloed i* ta&payer is on the cash

basis since no incoe is reported until the cash hasbeen collected

7/25/2019 Ch7 - 2015

6/54

6

'he $ig (icture @ %&aple 2

$ad "ebts @ Cash $asis 'a&payer

- Return to the *acts o* 'he $ig (icture on p. !@1.

- Martha is a cash basis ta&payer

/he cannot tae a bad debt deduction *or unpaid

accrued interest on the loan to her *riend because it

as never recognied as incoe.

7/25/2019 Ch7 - 2015

7/547

$usiness $ad "ebts)slide 1 o*

7/25/2019 Ch7 - 2015

8/548

$usiness $ad "ebts)slide 2 o*

7/25/2019 Ch7 - 2015

9/549

$usiness $ad "ebts)slide + o*

7/25/2019 Ch7 - 2015

10/5410

$usiness $ad "ebts)slide < o*

7/25/2019 Ch7 - 2015

11/5411

?onbusiness $ad "ebts)slide 1 o* 2

- ?onbusiness bad debt

"ebt unrelated to the ta&payer4s trade or business

-"educt as short@ter capital loss in yearaount o* orthlessness is non ith

certainty

?o deduction is alloed *or partial orthlessness

o* a nonbusiness bad debt

7/25/2019 Ch7 - 2015

12/5412

?onbusiness $ad "ebts)slide 2 o* 2

- Related party )individuals bad debts are

generally suspect and ay be treated as gi*ts

Regulations state that a bona *ide debt arises *ro

a debtor@creditor relationship based on a valid and

en*orceable obligation to pay a *i&ed or

deterinable su o* oney

'hus, individual circustances ust be e&ainedto deterine hether advances beteen related

parties are gi*ts or loans

7/25/2019 Ch7 - 2015

13/5413

Classi*ication o* $ad "ebts

- 7ndividuals ill generally have nonbusiness

bad debts unless#

7n the business o* loaning oney, or

$ad debt is associated ith the individual4s trade

or business

- "eterination is ade either at the tie the

debt as created or hen it becae orthless

7/25/2019 Ch7 - 2015

14/54

14


?onbusiness $ad "ebts


- Martha loaned her *riend, 3ail, 25,000.3ail used the oney to start a business, hich

subseBuently *ailed.hen 3ail died a*ter having ade payents o*

!,000 on the loan, he as insolvent.

- %ven though the proceeds o* the loan ereused in a business, the loan is a nonbusinessbad debt'he business as 3ail4s, not Martha4s.

7/25/2019 Ch7 - 2015

15/54

15

orthless /ecurities

- Loss on orthless securities is deductible in

the year they becoe copletely orthless

'hese losses are capital losses deeed to have

occurred on the last dayo* the year in hich the

securities becae orthless

Capital losses ay be o* liited bene*it due to the

+,000 capital loss liitation

7/25/2019 Ch7 - 2015

16/54

16


orthless /ecurities


- Martha, a calendar year ta&payer, oned stocin l Corporation )a publicly held copany.

/he acBuired the stoc on ctober 1, 201+- Cost as 50,000.

n May +1, 201

7/25/2019 Ch7 - 2015

17/54

17

$ad "ebt "eductions /uary

Concept Summary 7.2

7/25/2019 Ch7 - 2015

18/54

18

/ection 12

7/25/2019 Ch7 - 2015

19/54

19

/ection 12

7/25/2019 Ch7 - 2015

20/54

20

/ection 12

7/25/2019 Ch7 - 2015

21/54

21


/ection 12

7/25/2019 Ch7 - 2015

22/54

22

Losses o* 7ndividuals

- nly the *olloing losses are deductible by

individuals#

Losses incurred in a trade or business,

Losses incurred in a transaction entered into *or

pro*it,

Losses caused by *ire, stor, shiprec, or other

casualty or by the*t

7/25/2019 Ch7 - 2015

23/54

23

"e*inition o* Casualty

I 'he*t )C I '

- Losses or daages to the ta&payer4s property

that arise *ro *ire, stor, shiprec, or other

casualty or the*t

Loss is *ro event that is identi*iable, daaging to

ta&payer4s property, and sudden, une&pected, and

unusual in nature

%vents not treated as casualties include losses *rodisease and insect daage

7/25/2019 Ch7 - 2015

24/54

24

"e*inition o* 'he*t

- 'he*t includes robbery, burglary,

ebeleent, etc.

"oes not include isplaced ites

7/25/2019 Ch7 - 2015

25/54

25

hen Casualty I 'he*t 7s "eductible

- Casualties# year in hich loss is sustained

%&ception# 7* declared Jdisaster areaK by (resident,

can elect to deduct loss in year prior to year o*

occurrence

- 'he*ts# year in hich loss is discovered

7/25/2019 Ch7 - 2015

26/54

26

%**ect o* Clai *or Reiburseent

- 7* reasonable prospect o* *ull recovery#

?o casualty loss is peritted

"educt in year o* settleent any aount not

reibursed

- 7* only partial recovery is e&pected, deduct in

year o* loss any aount not covered

Reainder is deducted in year clai is settled

7/25/2019 Ch7 - 2015

27/54

27


"isaster Area Losses- Return to the *acts o* 'he $ig (icture on p. !@1.

- n /epteber 26, 201

7/25/2019 Ch7 - 2015

28/54

28

Aount o* CI' "eduction

- Aount o* loss and its deductibility depends

on hether#

Loss is *ro nonpersonal )business or production

o* incoe or personal property

Loss is partial or coplete

7/25/2019 Ch7 - 2015

29/54

29

Aount o* ?onpersonal

CI' Losses

- 'he*t or coplete casualty ):MN a*ter O 0

Ad9usted basis in property less insurance proceeds

- (artial casualty

Lesser o* decline in value or ad9usted basis in

property, less insurance proceeds

7/25/2019 Ch7 - 2015

30/54

30

CI' %&aples

- $usiness and production o* incoe losses

)no insurance proceeds received

Ad9usted :MN :MN7te $asis $e*ore A*ter Loss

A H,000 6,000 5,000 +,000

$ H,000 6,000 1,000 H,000C H,000

7/25/2019 Ch7 - 2015

31/54

31

?onpersonal CI' Losses

- Losses on business, rental, and royalty properties

"eduction ill beforA7

?ot sub9ect to the 100 per event and the 10 o* A7

liitation- Losses not connected ith business, rental, and

royalty properties

"eduction ill befromA7

%&aple @ the*t o* a security

- 'he*t losses o* investent property are not sub9ect to the 2 o*

A7 *loor on certain iscellaneous iteied deductions

7/25/2019 Ch7 - 2015

32/54

32

?onpersonal CI' ains

- "epending on the property, gain can be

ordinary or capital

- Aount o* nonpersonal gains

7nsurance proceeds less ad9usted basis in property

7/25/2019 Ch7 - 2015

33/54

33

(ersonal CI' ains and Losses)slide 1 o*

7/25/2019 Ch7 - 2015

34/54

34

(ersonal CI' ains and Losses)slide 2 o*

7/25/2019 Ch7 - 2015

35/54

35

(ersonal CI' ains and Losses)slide + o*

7/25/2019 Ch7 - 2015

36/54

36

(ersonal CI' ains and Losses)slide < o*

7/25/2019 Ch7 - 2015

37/54

37

%&aple o* CI' Liitation)slide 1 o* 2

- Qaren )A7 O

7/25/2019 Ch7 - 2015

38/54

38

%&aple o* CI' Liitation)slide 2 o* 2

- %&aple o* CI' liitation )cont4d

- Qaren has no insurance coverage *or either

loss#1. H,000 500 O H,500 100 O H,

7/25/2019 Ch7 - 2015

39/54

39

Research and %&periental

%&penditures)slide 1 o* 2

- "e*inition o* research and e&periental )RI%

e&penditures

Costs *or the developent o* an e&periental

odel, plant process, product, *orula, invention,or siilar property and iproveent o* such

e&isting property

7/25/2019 Ch7 - 2015

40/54

40

Research and %&periental

%&penditures)slide 2 o* 2

- 'hree alternatives are available *or RI%e&penditures%&pense in year paid or incurred,

"e*er and aortie over period o* H0 onths orore, or

Capitalie )deductible hen pro9ect abandoned ororthless

- 'a& credit o* 20 o* certain RI% e&pendituresis available

7/25/2019 Ch7 - 2015

41/54

41

"oestic (roduction Activities

"eduction)slide 1 o*

7/25/2019 Ch7 - 2015

42/54

42


"eduction)slide 2 o*

7/25/2019 Ch7 - 2015

43/54

43


"eduction)slide + o*

7/25/2019 Ch7 - 2015

44/54

44


"eduction)slide < o*

7/25/2019 Ch7 - 2015

45/54

45

?et perating Losses)slide 1 o* !

- ?Ls *ro any one year can be o**set against

ta&able incoe o* other years

'he ?L provision is intended as a *or o* relie*

*or business incoe and losses

nly losses *ro trade or business operations,

casualty and the*t losses, or losses *ro *oreign

governent con*iscations can create a ?L

7/25/2019 Ch7 - 2015

46/54

46

?et perating Losses)slide 2 o* !

- ?o nonbusiness )personal losses or

deductions ay be used in coputing ?L- %&ception# personal casualty and the*t losses

7/25/2019 Ch7 - 2015

47/54

47

?et perating Losses)slide + o* !

- Carryover period

Must carrybac to 2 prior years, then carry*orard to 20

*uture years

- May ae an irrevocable election to 9ust carry*orard

- hen there are ?Ls *ro to or ore years, use on a :7: basis

+ year carrybac is available *or#

- 7ndividuals ith ?L *ro casualty or the*ts

- /all businesses ith ?Ls *ro (residentially declared disasters

5@year carrybac period and a 20@year carryover period are

alloed *or a *aring loss

7/25/2019 Ch7 - 2015

48/54

48

?et perating Losses)slide < o* !

- %&aple o* ?L carryovers

Qen has a ?L *or 201

Ch7 - 2015

Documents

Transcript of Ch7 - 2015