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Transcript of Ch7 - 2015
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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.
Comprehensive Volume
1
Chapter !
"eductions and Losses#Certain $usiness %&pensesand Losses
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2
'he $ig (icture )slide 1 o* +
- Martha is nearing the end o* a year that she ould lie to*orget.
- /everal years ago she loaned a *riend 25,000 to enable hi tostart a business.
'he *riend had ade scheduled payents o* !,000 )1,000 o* this asinterest hen he une&pectedly died in 3anuary.- At the tie o* his death, he as insolvent.
Martha4s attepts to collect on the debt ere *ruitless.
- Last ctober Martha invested 50,000 in the stoc o* apharaceutical copany that previously had been pro*itable.
'he copany lost a patent in*ringeent suit and declared banruptcyin May o* this year.
Martha is noti*ied by the banruptcy trustee that she can e&pect toreceive nothing *ro the copany.
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'he $ig (icture )slide 2 o* +
- Martha has oned and operated a boostore as a soleproprietorship *or the past 10 years. 'he boostore previously has produced annual pro*its o*
about !5,000.
"ue to a chain boostore opening don the street, Martha4sboostore sustained a net loss o* 160,000 this year.
- 7n /epteber, a hurricane caused a large oa tree toblo over onto Martha4s house.
'he cost o* reoving the tree and aing repairs as+2,000. Martha received a chec *or 25,000 *ro her insurance
copany in *inal settleent o* the clai. 8er ad9usted basis *or the house as 260,000.
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'he $ig (icture )slide + o* +
- :inally, Martha purchased hat she believes to be
; 12 Read the chapter and *orulate your response.
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$ad "ebts
- 7* an account receivable arising *ro credit
sale o* goods or services becoes orthless
A bad debt deduction is peritted only i* incoe
arising *ro creation o* the receivable as
previously included in incoe
?o deduction is alloed i* ta&payer is on the cash
basis since no incoe is reported until the cash hasbeen collected
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6
'he $ig (icture @ %&aple 2
$ad "ebts @ Cash $asis 'a&payer
- Return to the *acts o* 'he $ig (icture on p. !@1.
- Martha is a cash basis ta&payer
/he cannot tae a bad debt deduction *or unpaid
accrued interest on the loan to her *riend because it
as never recognied as incoe.
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$usiness $ad "ebts)slide 1 o*
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$usiness $ad "ebts)slide 2 o*
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$usiness $ad "ebts)slide + o*
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$usiness $ad "ebts)slide < o*
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?onbusiness $ad "ebts)slide 1 o* 2
- ?onbusiness bad debt
"ebt unrelated to the ta&payer4s trade or business
-"educt as short@ter capital loss in yearaount o* orthlessness is non ith
certainty
?o deduction is alloed *or partial orthlessness
o* a nonbusiness bad debt
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?onbusiness $ad "ebts)slide 2 o* 2
- Related party )individuals bad debts are
generally suspect and ay be treated as gi*ts
Regulations state that a bona *ide debt arises *ro
a debtor@creditor relationship based on a valid and
en*orceable obligation to pay a *i&ed or
deterinable su o* oney
'hus, individual circustances ust be e&ainedto deterine hether advances beteen related
parties are gi*ts or loans
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Classi*ication o* $ad "ebts
- 7ndividuals ill generally have nonbusiness
bad debts unless#
7n the business o* loaning oney, or
$ad debt is associated ith the individual4s trade
or business
- "eterination is ade either at the tie the
debt as created or hen it becae orthless
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'he $ig (icture @ %&aple 5
?onbusiness $ad "ebts
- Return to the *acts o* 'he $ig (icture on p. !@1.
- Martha loaned her *riend, 3ail, 25,000.3ail used the oney to start a business, hich
subseBuently *ailed.hen 3ail died a*ter having ade payents o*
!,000 on the loan, he as insolvent.
- %ven though the proceeds o* the loan ereused in a business, the loan is a nonbusinessbad debt'he business as 3ail4s, not Martha4s.
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orthless /ecurities
- Loss on orthless securities is deductible in
the year they becoe copletely orthless
'hese losses are capital losses deeed to have
occurred on the last dayo* the year in hich the
securities becae orthless
Capital losses ay be o* liited bene*it due to the
+,000 capital loss liitation
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'he $ig (icture @ %&aple 6
orthless /ecurities
- Return to the *acts o* 'he $ig (icture on p. !@1.
- Martha, a calendar year ta&payer, oned stocin l Corporation )a publicly held copany.
/he acBuired the stoc on ctober 1, 201+- Cost as 50,000.
n May +1, 201
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$ad "ebt "eductions /uary
Concept Summary 7.2
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/ection 12
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/ection 12
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/ection 12
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'he $ig (icture @ %&aple 10
/ection 12
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Losses o* 7ndividuals
- nly the *olloing losses are deductible by
individuals#
Losses incurred in a trade or business,
Losses incurred in a transaction entered into *or
pro*it,
Losses caused by *ire, stor, shiprec, or other
casualty or by the*t
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"e*inition o* Casualty
I 'he*t )C I '
- Losses or daages to the ta&payer4s property
that arise *ro *ire, stor, shiprec, or other
casualty or the*t
Loss is *ro event that is identi*iable, daaging to
ta&payer4s property, and sudden, une&pected, and
unusual in nature
%vents not treated as casualties include losses *rodisease and insect daage
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"e*inition o* 'he*t
- 'he*t includes robbery, burglary,
ebeleent, etc.
"oes not include isplaced ites
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hen Casualty I 'he*t 7s "eductible
- Casualties# year in hich loss is sustained
%&ception# 7* declared Jdisaster areaK by (resident,
can elect to deduct loss in year prior to year o*
occurrence
- 'he*ts# year in hich loss is discovered
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%**ect o* Clai *or Reiburseent
- 7* reasonable prospect o* *ull recovery#
?o casualty loss is peritted
"educt in year o* settleent any aount not
reibursed
- 7* only partial recovery is e&pected, deduct in
year o* loss any aount not covered
Reainder is deducted in year clai is settled
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'he $ig (icture @ %&aple 15
"isaster Area Losses- Return to the *acts o* 'he $ig (icture on p. !@1.
- n /epteber 26, 201
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Aount o* CI' "eduction
- Aount o* loss and its deductibility depends
on hether#
Loss is *ro nonpersonal )business or production
o* incoe or personal property
Loss is partial or coplete
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Aount o* ?onpersonal
CI' Losses
- 'he*t or coplete casualty ):MN a*ter O 0
Ad9usted basis in property less insurance proceeds
- (artial casualty
Lesser o* decline in value or ad9usted basis in
property, less insurance proceeds
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CI' %&aples
- $usiness and production o* incoe losses
)no insurance proceeds received
Ad9usted :MN :MN7te $asis $e*ore A*ter Loss
A H,000 6,000 5,000 +,000
$ H,000 6,000 1,000 H,000C H,000
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?onpersonal CI' Losses
- Losses on business, rental, and royalty properties
"eduction ill beforA7
?ot sub9ect to the 100 per event and the 10 o* A7
liitation- Losses not connected ith business, rental, and
royalty properties
"eduction ill befromA7
%&aple @ the*t o* a security
- 'he*t losses o* investent property are not sub9ect to the 2 o*
A7 *loor on certain iscellaneous iteied deductions
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?onpersonal CI' ains
- "epending on the property, gain can be
ordinary or capital
- Aount o* nonpersonal gains
7nsurance proceeds less ad9usted basis in property
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(ersonal CI' ains and Losses)slide 1 o*
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(ersonal CI' ains and Losses)slide 2 o*
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(ersonal CI' ains and Losses)slide + o*
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(ersonal CI' ains and Losses)slide < o*
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%&aple o* CI' Liitation)slide 1 o* 2
- Qaren )A7 O
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%&aple o* CI' Liitation)slide 2 o* 2
- %&aple o* CI' liitation )cont4d
- Qaren has no insurance coverage *or either
loss#1. H,000 500 O H,500 100 O H,
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Research and %&periental
%&penditures)slide 1 o* 2
- "e*inition o* research and e&periental )RI%
e&penditures
Costs *or the developent o* an e&periental
odel, plant process, product, *orula, invention,or siilar property and iproveent o* such
e&isting property
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Research and %&periental
%&penditures)slide 2 o* 2
- 'hree alternatives are available *or RI%e&penditures%&pense in year paid or incurred,
"e*er and aortie over period o* H0 onths orore, or
Capitalie )deductible hen pro9ect abandoned ororthless
- 'a& credit o* 20 o* certain RI% e&pendituresis available
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"oestic (roduction Activities
"eduction)slide 1 o*
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"oestic (roduction Activities
"eduction)slide 2 o*
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"oestic (roduction Activities
"eduction)slide + o*
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"oestic (roduction Activities
"eduction)slide < o*
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?et perating Losses)slide 1 o* !
- ?Ls *ro any one year can be o**set against
ta&able incoe o* other years
'he ?L provision is intended as a *or o* relie*
*or business incoe and losses
nly losses *ro trade or business operations,
casualty and the*t losses, or losses *ro *oreign
governent con*iscations can create a ?L
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?et perating Losses)slide 2 o* !
- ?o nonbusiness )personal losses or
deductions ay be used in coputing ?L- %&ception# personal casualty and the*t losses
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?et perating Losses)slide + o* !
- Carryover period
Must carrybac to 2 prior years, then carry*orard to 20
*uture years
- May ae an irrevocable election to 9ust carry*orard
- hen there are ?Ls *ro to or ore years, use on a :7: basis
+ year carrybac is available *or#
- 7ndividuals ith ?L *ro casualty or the*ts
- /all businesses ith ?Ls *ro (residentially declared disasters
5@year carrybac period and a 20@year carryover period are
alloed *or a *aring loss
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?et perating Losses)slide < o* !
- %&aple o* ?L carryovers
Qen has a ?L *or 201