Chapter 7 - Deductions and Losses: Certain Business Expenses and Losses

Question 1

What are bad debts?

Answer 1

When customers does not pay or when people don’t pay back what they owe you.

Question 2

When is a bad debt deduction permitted?

Answer 2

Under the accrual basis, you are allowed to deduct bad debt expense because you already recorded the sale. Under the cash basis, you are not allowed to deduct bad debt expense because you have not recorded the sale until payment is made. However, borrowed money can be deducted when it is not paid back.

Question 3

What is a non-business bad debt?

Answer 3

A debt unrelated to the taxpayer’s trade or business either when it was created or when it became worthless. Deductible as short term capital loss limited to $3,000.

Question 4

What is business bad debt?

Answer 4

A debt related to the taxpayer’s trade or business. It can be written off if partially worthless. Deductible as ordinary loss not limited (for AGI)

Question 5

Loans between related parties

Answer 5

Dealing with family members, spouse, siblings, half siblings, ancestor, linear descendant. Must provide sufficient support for loan otherwise consider to be a gift and tax if over limit $14,000.

Question 6

What are worthless securities?

Answer 6

A loss is allowed for securities that become completely worthless during the year. Must be legally deem worthless before you can deduct. The losses are treated as capital losses deemed worthless on the last day of the taxable year. Which may classify a STCL to a LTCL.

Question 7

What is section 1244 stock?

Answer 7

Small business stock

Question 8

What is consider to be small business stock?

Answer 8

Domestic C corp, asset limited, capital receive from selling stock is limited, passive income is limited.

Question 9

How to treat losses from section 1244 stock?

Answer 9

You can deduct ordinary losses limited to $50,000 single and $100,000 married filling jointly. Treat the excess of limitation loss as capital loss.

Question 10

$60,000 loss from section 1244 stock, filling status is single. How would you treat the loss?

Answer 10

therefore, 60,000-50,000(ordinary loss limit) = 10,000 excess, treated as capital loss.

Question 11

Form 4684

Answer 11

Casualties and theft

Question 12

Rules of casualty losses

Answer 12

1. identifiable
2. damaging to property
3. due to sudden, unexpected, and unusual in nature.

Question 13

Business casualty losses

Answer 13

For AGI deduction with no limitation

Question 14

Personal casualty losses

Answer 14

itemized deduction, subject to $100 reduction per casualty loss, 10% of AGI

Question 15

Events that are not consider casualties

Answer 15

1. Decline in value of home

2. Termite damage

Question 16

Theft losses

Answer 16

It is deducted in the year the theft was discovered.

Question 17

When will a casualty loss not be reported?

Answer 17

When the taxpayer is expected to get fully reimbursed by the insurance company. Tax benefit rule

Question 18

General rule: when to deduct casualty losses?

Answer 18

is deducted in the year the loss occurs. no casualty loss is permitted if a reimbursement claim with a reasonable prospect of full recovery.

Question 19

How would you report a casualty gain?

Answer 19

report as income if insurance reimbursement > casualty.

Question 20

Disaster area losses

Answer 20

Must be declared a disaster area by the president of US. You are allowed to deduct casualty losses in the prior year. help relief taxpayer. If prior year return has been file, you can amend return to get the refund.

Question 21

If a business property or property held for the production of income (e.g., rental property) is completely destroyed, lose is equal to?

Answer 21

the loss is equal to the adjusted basis of the property at the time of destruction. (adjusted basis - insurance reimburse) (for AGI deduction)

Question 22

How to measure partial destruction of business property and income producing property and for partial or complete destruction of personal property?

Answer 22

The loss is the lesser of adjusted basis or fmv before casualty - fmv after casualty minus the insurance reimbursement

Question 23

What is a replacement cost?

Answer 23

Cost to replace the damage house,( not improvements). This number is substituted for the fmv before casualty since most people don’t know the value of their home.

Question 24

How to treat a casualty that affects both business and personal?

Answer 24

Treat them separately.

Question 25

Personal casualty gains and losses

Answer 25

A taxpayer who has both gains and losses must first offset the gain and losses. If you have net gain, then individual gains and losses are treated as capital gain and losses. If you have a net loss, individual gains is treated as ordinary income and individual loss is treated as ordinary loss to the extent you have ordinary income, excess is subject to 10% AGI and is itemized.

Question 26

What are research a experimental expenditures?

Answer 26

R&D cost incur in developing the product.

Question 27

The law permits 3 ways of handling R&D cost

Answer 27

1. Expensed in the year paid or incurred (commonly use, depend if you have income. if no income then defer and amortized)
2. Deferred and amortized. (60 mos period, wait until you realized the benefit to expense, product: when you sell, process: use the process)
3. Capitalized (not many company do this)

Question 28

What is section 199?

Answer 28

Domestic production activities deduction, new tax deduction that encourages company to produce domestically.

Question 29

Form 8903

Answer 29

Actual calculation of DPAD

Question 30

Calculation of DPAD

Answer 30

The lesser of the qualified production activities income (QPAI) or Taxable income X 9% (limited to 50% of related W-2 wages

Question 31

Example of DPAD

Answer 31

after calculation you get $100,000. limited to 50% of W-2 wages $150,000. therefore, 150,000*50%=75,000 deduction.
If the 50% limit is greater than the 100,000. you can deduct 100,000.

Question 32

Calculation of QPAI

Answer 32

the excess of domestic production gross receipts (DPGR) : cost relating to the production , domestic sales - cogs.

Question 33

Net operating losses general rule

Answer 33

NOL : carry back 2 years

Carryforward 20 years

Question 34

When can you carryback a NOL for 3 years?

Answer 34

1. if NOL is from casualty or theft

2. small business who NOL result from presidential declared disaster.

Question 35

When can you carryback NOL for 5 years?

Answer 35

Farming loss

Question 36

Form 1040X ( example relating to NOL)

Answer 36

Amend a return (ex. 2013- NOL, you file a 1040x to amend the return and include nol for 2011

Question 37

Form 1045 (example relating to NOL)

Answer 37

Tentative request for refund (have multiple year in that form so you can include NOL)

Question 38

Sequence of use of NOLs

Answer 38

Use the earlier year loss first until it is completely absorbed. Then apply the later year losses until it is completely absorbed.