Chapter 8 Losses and bad debts
Chapter 8 Losses and Bad Debts
Learning Objectives Identify transactions that may result in losses Determine the proper classification for losses Calculate the suspended loss from passive activities Identify what constitutes a passive activity loss
Learning Objectives • Identify transactions that may result in losses • Determine the proper classification for losses • Calculate the suspended loss from passive activities • Identify what constitutes a passive activity loss
Learning Objectives Determine when a taxpayer has materially participated in a passive activity Identify and calculate the deduction for a casualty or theft loss Compute the deduction for a bad debt Compute a net operating loss deduction
Learning Objectives • Determine when a taxpayer has materially participated in a passive activity • Identify and calculate the deduction for a casualty or theft loss • Compute the deduction for a bad debt • Compute a net operating loss deduction
Transactions That May Result in losses Sale or exchange of property Expropriation, seizure, or confiscation of property Abandonment of property Worthless securities Demolition of property
Transactions That May Result In Losses • Sale or exchange of property • Expropriation, seizure, or confiscation of property • Abandonment of property • Worthless securities • Demolition of property
Classifying The Loss On A Taxpayer’ S Return departmen Ordinary VS Capital loss Disallowance possibilities
Classifying The Loss On A Taxpayer’s Return • Ordinary vs. Capital loss • Disallowance possibilities
Ordinary Vs. Capital Loss Dependent on type of property involved and type of transaction involved Losses on qualifying Sec. 1244 stock are treated as ordinary rather than capital loss($50,000 limitation or $100, 000 if filing MFJ)
Ordinary Vs. Capital Loss • Dependent on type of property involved and type of transaction involved • Losses on qualifying Sec. 1244 stock are treated as ordinary rather than capital loss($50,000 limitation or $100,000 if filing MFJ)
Qualification as Sec. 1244 Stock Must be issued and owned by an individual or partnershi Corporation must be domestic Stock must be issued for cash or property, not services
Qualification as Sec. 1244 Stock • Must be issued and owned by an individual or partnership • Corporation must be domestic • Stock must be issued for cash or property, not services
Qualification as Sec. 1244 Stock Corporation must not have derived 50 of gross receipts from passive income sources during the immediately preceding 5 tax years, and At the time stock is issued the amount of money and property contributed to both capital and paid in surplus may not exceed $1 million
Qualification as Sec. 1244 Stock • Corporation must not have derived > 50% of gross receipts from passive income sources during the immediately preceding 5 tax years, and • At the time stock is issued, the amount of money and property contributed to both capital and paidin surplus may not exceed $1 million
Disallowance possibilities Transfers of property to a controlled corporation in exchange for stock Property sold to certain related parties Wash sales Losses limited because the losses exceed the amount for which the taxpayer is at risk
Disallowance Possibilities • Transfers of property to a controlled corporation in exchange for stock • Property sold to certain related parties • Wash sales • Losses limited because the losses exceed the amount for which the taxpayer is at risk
Passive losses Computation of passive losses and credits Carryovers Definition of passive activity
Passive Losses • Computation of passive losses and credits • Carryovers • Definition of passive activity
