Deductions and Losses: Certain Business Expenses and Losses: Comprehensive Volume
Deductions and Losses: Certain Business Expenses and Losses: Comprehensive Volume
Bad Debts
If an account receivable arising from credit
sale of goods or services becomes worthless
A bad debt deduction is permitted only if income
arising from creation of the receivable was
previously included in income
No deduction is allowed if taxpayer is on the cash
basis since no income is reported until the cash has
been collected
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Worthless Securities
Loss on worthless securities is deductible in
the year they become completely worthless
These losses are capital losses deemed to have
occurred on the last day of the year in which the
securities became worthless
Capital losses may be of limited benefit due to the
$3,000 capital loss limitation
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Worthless Securities
Return to the facts of The Big Picture on p. 7-1.
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Losses of Individuals
Only the following losses are deductible by
individuals:
Losses incurred in a trade or business,
Losses incurred in a transaction entered into for
profit,
Losses caused by fire, storm, shipwreck, or other
casualty or by theft
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Definition of Casualty
& Theft (C & T)
Losses or damages to the taxpayers property
that arise from fire, storm, shipwreck, or other
casualty or theft
Loss is from event that is identifiable, damaging to
taxpayers property, and sudden, unexpected, and
unusual in nature
Events not treated as casualties include losses from
disease and insect damage
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Definition of Theft
Theft includes robbery, burglary,
embezzlement, etc.
Does not include misplaced items
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Alternatively, she may take the loss on her 2014 income tax return.
The amount of the loss will be reduced first by $100 and then by 10% of
her 2014 AGI.
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Amount of Nonpersonal
C&T Losses
Theft or complete casualty (FMV after = 0)
Adjusted basis in property less insurance proceeds
Partial casualty
Lesser of decline in value or adjusted basis in
property, less insurance proceeds
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C&T Examples
Business and production of income losses
(no insurance proceeds received)
Adjusted
Item Basis
A
6,000
B
6,000
C
6,000
FMV
Before
8,000
8,000
4,000
FMV
After
5,000
1,000
0
Loss
3,000
6,000
6,000
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Carryover period
Must carryback to 2 prior years, then carryforward to 20
future years
May make an irrevocable election to just carryforward
When there are NOLs from two or more years, use on a FIFO basis
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Casualty Loss
The loss on the damage to Marthas personal residence is a personal casualty
loss.
Using the cost of repairs method, the amount of the casualty loss is $7,000 ($32,000
- $25,000).
This amount must be reduced by $100 and 10% of AGI.
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