Deductions- Losses and Bad Debts

Question 1

What are the provisions regarding deducting worthless securities?

Answer 1

• In general security must be totally worthless
• Worthless asset is treated as being sold for nothing on the last day of the year
• Treated as a capital loss unless incurred by a corporation on its investment in an affiliated corporation (more than 80% ownership) in which case it’s an ordinary loss

Question 2

Can cash basis taxpayers deduct losses from sales on account? On loans?

Answer 2

• No

- Yes

Question 3

When are non-business bad debts deductible?

Answer 3

• In year of complete worthlessness

- No partial worthlessness allowed

Question 4

How are NOL’s treated?

Answer 4

• As a deduction for AGI for an individual and a regular business deduction for a corporation
• Carried back 2 and forward 20