Chapter 7 Flashcards
How are business bad debts treated?
Bad debt deductions are permitted only if income arising from the creation of receivable was included in income. (Individual tax payers do not have receivables)
How are business bad debts treated on the accrual basis?
Deduct as ordinary loss in year when debt is worthless. Doesn’t allow for reserves.
How are non business bad debts treated?
Deduct as short term capital loss in year amount of worthlessness is known with certainty.
Grandpa lends grandchild 1 million and records as BDE, what is wrong with this transaction?
This is not a business debt. Recording the loan as BDE forgives it without paying gift or income tax. Related party relationship makes it not a valid debtor creditor relationship.
How do you expense R&D?
Expense R&D in year they occur. Can defer deduction by amortizing expense
What are the rules on deducting excess business losses?
250k/500k rule S/MFJ. Limits benefits of how much you can deduct in a given year but lets you carry it forward.
How are net operating losses treated?
NOL from one year can be offset against taxable income from future years.
Why do we need deductions for net operating losses?
For “Lifetime income smoothing” because we don’t have negative tax rates.
Your business loses 100 million in year 1 and reports a gain of 175 million in year 2, how much is taxable?
Pay taxes on 75 million in year 2 because the net operating loss from year 1 carries over.
How do you calculate excess business losses
Expenses/deductions incurred in business - Income earned - threshold amount (250/500). The “excess” amount is carried over to next year
NOL is used for calculating for or from agi
For AGI
