Chapter 6: Losses and Loss Limitations Flashcards
bad debt deduction
a bad debt deduction is allowed for loaned money that is not repaid, or a service provided on account that the money is never received for.
cash basis bad debt
no deduction is allowed for a bad debt arising from the sale of a product or service when the taxpayer is on the cash basis because no income is reported until the cash has been collected. allowing this would result in a double deduction
specific charge off method
business may claim a deduction when a specific business debt becomes either partially to wholly worthless or when a specific nonbusiness debt becomes wholly worthless. the business debt must be demonstrated as wholly worthless to the IRS. if the business debt that was partially worthless becomes wholly worthless then only the remainder not previously deducted can be deducted in the future year. in the case of total worthlessness a deduction for that amount is available in the year of worthlessness. This amount is determined by what your basis is in the item, how much you paid for it is what is deductible.
collected bad debts
if previously written off and then collected in the same year, the entry is reversed. if in a later year the income is now included in recognized income, it will be subject to the tax benefit rule. income will result if the deduction yielded a tax benefit in the year it was taken. (pg 6-3)
summary table of bad debts
pg 6-3
business bad debt
business if the lender is in the business of lending money or whether there is a proximate relationship between the creation of the debt and the lenders trade or business. any bad debt resulting from loans made by a corporation are automatically business bad debt. this kind of bad debt is deductible as an ordinary loss in the year incurred
nonbusiness bad debt
nonbusiness if those conditions are not met, this generally applies to individuals. this is treated as a short-term capital loss
loans between related parties
must be determined to be a bona fide loan. was a note properly executed? was there a reasonable rate of interest? was collateral provided? What collection efforts were made? what was the intent of the parties?
bona fide debt
arises from a debtor creditor relationship based on a valid and enforceable obligation to pay a fixed or determinable sum of money
net operating loss
a deduction is allowed to provide partial relief from inequitable tax treatment (from uneven income over several years). only c corporations and individuals allowed this deduction.
current NOL
usually carried back and deducted against income over the two preceding tax years. it is carries back first to the second year before the loss year and then to the year immediately preceding the loss year. if the loss is not completely used on those two years it is carried forward fro twenty years
NOL carry back
when carried back, the taxpayer requests an immediate refund of prior years taxes by filing an amended return for the previous two years.
NOLs in multiple years
the earliest years loss is used first. later years losses can then be used to until they offset income or are lost. each loss is computed and applied separately.