Deductions - Losses and Bad Debts Flashcards
When are bad debts deductible?
Only wen accrual basis TP recognized income previously - have basis in the receivable.
What method is used for accounts receivable bad debt estimation under GAAP? For tax purpose?
GAAP: allowance method.
Tax: The specific-charge off method (Financial institutions can use the reserve method).
How is a business bad debt deducted? When?
Deducted against ordinary income.
In the year that partial or total worthlessness occurs.
What is the classification of non-business bad debt? When is it deductible?
Always treated as a short-term capital loss.
When it becomes totally worthless. Partial bad debt is not allowed for deduction.
When stocks or bonds become worthless, how is it treated? Can partial loss be deductible?
As being sold for no consideration on last day of the year.
No, must be completely worthless.
Net operating losses: what’s the tax treatment?
Must be carried back to the 2 preceding tax years (beginning with the 2nd prior year) unless an election is made in the year of the NOL to forgo the carry back.
NOL: what is the carry forward length?
20 years.
What are the only 2 items that are allowed for NOL?
Business losses and casualty losses.
NOL: what is the treatment of nonbusiness losses or expenses?
Must be added back to the taxable loss to determine the NOL.
NOL computation if starting with taxable loss?
Taxable loss
+ personal exemptions
+ Std deduction or itemized deductions (except for casualty loss) and other non-business deductions in excess of non-business income
+ Excess of non-business capital losses over non-business capital gains (limited to $3,000)
+ An NOL deduction from another year
NOL computation other way?
Comput difference between business income and business losses.
Business income
+ non-business income less non-business deductions (std) (- if negative, $0?).
- Business losses
= NOL
When stocks or bonds of affiliated business (owe more than 80%) become worthless, is it capital loss?
No, ordinary loss.
What’s the classification of worthless stock?
Capital loss
