Loss limitation for Individuals

Question 1

Tax basis limitation

Answer 1

flow-through entities k-1

• deduct to the extent of the owner’s tax basis
• loss in excess carried forward indefinitely

Question 2

At-risk basis limitation

Answer 2

flow-through entities k-1

• deducted to the extent that the owner is “at risk”
• excludes owners share of certain debt ( nonrecourse)
• carried forward indefinitely

Question 3

Passive Activity loss

Answer 3

• rental real estate
• doesnot materially participate
• limited to partnership interest
  ……………………
  Material participation
• active, regular, continuous n substantial basis ( more than 500 hours during tax year is the most common one)
  ………………………….
  deduction of passive activity loss
  ONLY against passive activity income pro rata

net PAL is suspended and carried forward indefinitely

disposes of activity can be offset against active/passive/portfolio ( loss allowed when sold)
- tax basis limitation is not allowed when sold, it will be lost forever

Question 4

PAL exception
MOM-and-POP exception:

Real estate professional exception

Answer 4

MOM-and-POP exception:
can deduct upto 25k per year of net PAL attributable to rental real estate if
- actively participate in the rental real
- owns at least 10%

25k reduced by 50% of the excess of AGI over $100k 
eliminated when AGI is over 150k 
......................................
Real estate professional exception 
- more than 50% & 
- more than 750 hours

Question 5

Excess business loss

Answer 5

• not allowed to deduct the overall “ excess business loss”
• for 2021 the threshold amount $524k (MFL) and $262k for others
• NOL carried forward

Question 6

Net Capital loss

Answer 6

3k max deduction for individual

excess net capital loss : carry forward an unlimited t

Question 7

personal ( non biz ) bad debt

worthless stock and securities

Answer 7

personal ( non biz ) bad debt : treated as short term capital loss in the year debt becomes totally worthless

worthless stock and securities
capital loss, as if they were sold on the last day of the taxable year in which they became totally worthless

Question 8

Employee stock option : non qualified option

Answer 8

nonqualified option

• if the option has a **readily ascertainable value at the time of the grant
• generally taxed when exercised

** readily ascertainable value (taxable at grant if FMV known)
will have value if traded on establish market if not have to meet following to have the value:
- is transferable
- excersiable immediately in full when granted
- non conditions or restriction that would have a significant effect on the value
- fair value of the option privilege is readily established
……………………………………..

Employee taxation: Readily ascertainable value

• taxed when granted ( as ordinary income)
• bragain element ( i.e. value - cost ( if any)
• no tax on date of exercise
• any future sale - capital gain/loss
• lapse( not exercised ) - capital loss

……………………………….
Employee taxation: no readily ascertainable value
- taxed at exercise ( ordinary income ) - bragain element ( i.e. value - cost ( if any)
- lapse - capital loss equal to the price, is any, that employee paid for

………………………………
Employer Taxation:
Deduct/ expense in same year that employee reports income

Question 9

Employee stock option : qualified option

2 types

Answer 9

(1) Incentive Stock Option

• approved by shareholders
• granted within 10 years
• exercise price may not be less than the FMV
• not own more than 10%
• held at least two years
• remain an employee from the date of the option is granted until three months before the option is exercised

..................
Employee taxation: 
- not taxable income/compensation when granted/exercised 
- taxable as capital gain/loss when sold 
- option lapse, no deduction 
...............
employer taxation: 
- no tax deduction 

…………………………..

(2) Employee Stock Purchase Plan
- written and approved by shareholders
- can not grant to employee who has 5% or more combined voting power
- must include all full-time employees
- exercise price may not be less than 85% of FMV
- cant be exercised more than 27 months after
- stock must be held at least two years
- remain an employee until three months before than option is exercised

…………………..
employee taxation
- not taxable income/compensation when granted/exercised
- taxable as capital gain/loss when sold
- option lapse, no deduction

• exercise price less than FMV ( bargain ) - ordinary income when stock is sold ( difference of FMV and selling - bargain)

…………………….
employer taxation:
- no tax deduction