Week 3 Chapter 11 Flashcards
Caualthy and Theft Losses
The Internal Revenue Code (IRC) permits deductions for losses from theft or casualty, especially from federally declared disasters.
Casualty Loss Definition
Loss from unexpected external events such as natural disasters.
Deductible Amount
Losses over $100 exceeding 10% of Adjusted Gross Income (AGI) are deductible.
Casualty Loss
Kaitlyn, a veterinarian, suffered business losses of $20,500 due to a storm destroying her equipment, leading to full deductibility because the items were business assets.
Reimbursement Considerations
Only unreimbursed loss amounts are deductible.
Timing of Deductions
Casualty losses are deductible in the year they occur; theft losses are deductible when discovered.
Disaster Losses
Taxpayers can deduct disaster losses on the current or previous year’s return. Losses are claimed on Schedule A as itemized deductions and must exceed $100 plus 10% of AGI.
Hobby Losses
Definition of Hobby
Presumption of Profit
Definition of Hobby
Activities not primarily for profit, and losses cannot offset other income.
Presumption of Profit
Profit in 3 of 5 years for businesses and 2 of 7 for horse-related activities indicates a business.
capital losses
capital assets
realized vs recognized gains/ losses
capital assets
Include stocks and property holding for investment. Ordinary business property is excluded.
Realized vs Recognized gains/ loss
Realized on sale; recognized unless specified otherwise by IRC.
Realized Gain
A building purchased for $400,000, sold for $700,000 after improvements, yields a realized gain of $400,000 after accounting for adjusted basis and depreciation.
Net Operating Loss (NOL)
NOLs occur when business expenses exceed income, allowing losses to be carried forward or, in some cases, back to offset taxable income.
NOL Treatment
NOLs post-2021 can carry forward indefinitely, limited to 80% of the taxable income in the carry-forward year.
Passive Activity Loss Rules
Passive activity losses can only offset passive income, with specific definitions around material participation:
Material Participation Tests include
Over 500 hours of participation,
Substantial participation compared to others, etc.
Rental Real Estate
Active participants in rental activities can deduct up to $25,000 of losses against other income, subject to AGI phaseouts.
Allowed Rental Loss
A taxpayer with a $120,000 MAGI can deduct $15,000 of a $30,000 rental loss due to AGI limitations.
Computation of Tax Liability
Gross Income - Deductions for AGI = Adjusted Gross Income
- Itemized or Standard Deduction - Qualified Business Income Deduction = Taxable Income
× Tax Rate = Income Tax + Other Taxes = Total Tax
- Refundable Credits - Nonrefundable Credits - Tax Payments = Amount Owed or Refund
Self-Employment Tax
Self-employment taxes are assessed on net earnings, calculated through specific FICA rate tiers.
Net Earnings from Self-Employment
A sole proprietor reports net earnings of $260,196 after adjusting for self-employment income.
Net Investment Income Tax (NIIT)
A 3.8% tax applies to investment income surpassing certain thresholds, which differ based on filing status.
Threshold
Filing Status Threshold Amount
Married / Surviving Spouse $250,000
Single / Head of Household $200,000
Married Filing Separately $125,000
Tax Credits
Credits serve to reduce tax liability and come in two forms:
nonrefundable credits
refundable credits
Nonrefundable Credits
Cannot exceed tax liability (e.g., Foreign Tax Credit).
Refundable Credits:
Can exceed tax liability and result in a refund (e.g., Earned Income Credit).
