Chapter 7 Flashcards
Losses and Bad Debts.
A loss must be
Realized, definable, must result from a identifiable event, real economic loss (must be able to put a $ amount to it), the deduction must be used by the person who incurred the loss.
Casualty Losses
Losses arising from fire, storm, ship- wreck, or another type of casualty.
Wagering Losses
The Code specifically provides that losses from wagering are deductible only to the extent
that wagering gains are reportable as income. Unless the taxpayer can show that he or she is a professional gambler, such losses must be deducted as a miscellaneous itemized deduction on Schedule A of Form 1040. Such losses are not subject to the 2 percent floor that applies to most miscellaneous itemized deductions.
Business losses are deducted above-the-line and personal losses from theft or casualty are below-the-line (itemized deductions)
True
Rules for the Deductibility of Casualty and Theft Losses
- The loss must be attributable to federally-declared disaster areas.
- Casualty losses must be deducted in the year the loss is incurred.
- There must be a sudden event or sudden impact that results in the loss for a deduction to be allowed.
- The amount of a casualty or theft loss eligible for a deduction is reduced by $100 for each loss suffered by the taxpayer.
- Personal casualty and theft losses of individuals are also subject to a “floor” of 10 percent of the taxpayer’s adjusted gross income.
- The amount of a casualty or theft loss is the difference (i.e., decline) in the fair market value of the property before and after the event.
Example of a deductible loss
Example
Nancy Fleet’s home is damaged by flood. The damage is deemed attributable to a federally-declared disaster area. Her home is not insured for this loss because flood is specifically excluded under her homeowner’s policy. Therefore, she has no insurance reimbursement for her losses. The fair market value of her home and its contents before the flood was $135,000. After the flood, the value is $90,000. Her basis in her home and its contents is $100,000. The amount of her loss is $45,000 ($135,000 – $90,000). This loss amount is not in excess of her basis in the property. Nancy’s adjusted gross income for the year is $95,000. She has suffered no other casualty losses during the year.
One hundred dollars must be subtracted from the amount of Nancy’s loss. Thus, her loss is now $44,900 for deduction purposes. She is permitted to deduct this loss only to the extent it exceeds 10 percent of her adjusted gross income of $95,000. Her deductible loss is, therefore, $35,400 ($44,900 – [$95,000 × .10]). In this example, there is no insurance recovery. Of course, if Nancy’s loss was covered by insurance, she would not be able to deduct any of it unless she filed a timely claim for reimbursement. Then,
her loss would be deductible only to the extent the amount of the loss exceeded the reimbursement.
Steps in Calculating Casualty and Theft Losses
- The amount of loss is the difference between property’s FMV before and after the event.
- The amount cannot be greater than the property’s adjusted basis.
- The amount of each specific loss is reduced by $100.
- The total amount of all casualty and theft losses is subject to a 10 percent of AGI floor.
Excess Business Loss
Excess business loss is defined as the amount by which the taxpayer’s aggregate deductions attributable to all trades or businesses exceeds the sum of the taxpayer’s aggregate gross income attributable to all such trades or businesses plus $250,000 ($500,000 in the case of joint filers).
NOL
Net Operating Loss
An excess business loss for the taxable year is disallowed and treated as a net operating loss (NOL) carryover to the next taxable year.
The Tax Cuts and Jobs Act also eliminates, for losses incurred after 2017, the two-year carryback of NOLs except in the case of certain disaster losses incurred in the trade or business of farming or by certain small businesses. Thus, individuals and businesses with NOLs will generally be prohibited from carrying the loss back to prior years and obtaining refunds.
What is a bad debt?
When there is no longer a reasonable expectation that the debt will be repaid
Business bad debts vs non-business bad debts
Business bad debts are deductible in full from the taxpayer’s ordinary income, while nonbusiness bad debts are specifically characterized by the Internal Revenue Code as short-term capital losses.
An individual’s net capital losses are deductible against ordinary income only to the extent of $3,000 per year. Business bad debts, on the other hand, are deductible in full against ordinary income.
True
No deduction is allowed for a loss of expected income unrealized due to a shift in employment opportunities.
True
A nonbusiness bad debt is treated as a short-term capital loss.
True
When stock in a corporation becomes worthless, the stockholder may generally claim a deduction under the rules applicable to a sale or exchange of a capital asset.
True
If a car used for business is totally destroyed in an accident, the owner’s deduction is equal to the car’s adjusted basis if the fair market value of the car immediately before the accident was lower than its adjusted basis.
True
A casualty loss that is not reimbursed will be deductible to the extent that it exceeds $100 on a single taxpayer’s return or $200 for taxpayers filing jointly.
False.
Qualifying nonreimbursed casualty losses are deductible to the extent (a) each loss exceeds $100 and (b) total losses are greater than 10 percent of the taxpayer’s adjusted gross income. Both of these limitations must be applied.
Individuals are allowed a deduction for personal losses in excess of a certain floor amount if they arise from either casualty or theft.
False
For tax years 2018 through 2025, casualty losses can only be deducted if they are related to a federally declared disaster.
A taxpayer who owns stock that has declined in value may take a deduction for that loss.
False
A mere decline in value, without a realizable event, does not give rise to a deductible loss.
If a deduction for a bad debt resulted in a tax benefit to a taxpayer, the future unexpected repayment of the debt will be treated as income.
True
Bad debts owed to a corporation may sometimes be characterized as nonbusiness bad debts for tax purposes.
False
Bad debts owed to a corporation are not treated as nonbusiness bad debts.
A taxpayer may take a casualty loss deduction for the value of a rare coin that he or she has mislaid.
False
Deductible casualty losses do not include the ordinary situation in which a taxpayer simply loses or mislays property.
Gambling losses are generally deductible only to the extent of gambling gains.
True
