Term
| What is the difference between the classification of a business bad debt and a nonbusiness bad debt? |
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Definition
Business Bad Debt- classified as a deduction for AGI
(it's an ordinary loss in the year incurred)
Nonbusiness Bad Debt- always classified as a ST capital loss |
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Term
What method must TP's use in accounting for bad debts?
Certain financial institutions are allowed to use what method? |
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Definition
TP- The Specific charge-off method
FI-The Reserve Method |
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Term
| When can a TP claim a deduction for a specific business debt or a nonbusiness debt? |
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Definition
When a business debt becomes partially or wholly worthless
AND
When a nonbusiness debt becomes wholly worthless |
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Term
| What is the amount of deduction for a debt that arose from the sale of services or products and what is it when the taxpayer purchased the debt? |
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Definition
For the sales- If the face amount was previously included in income, that amount is deduct.
Purchased the debt- Deduct. = amount paid for the debt instrument |
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Term
| What is a nonbusiness bad debt? |
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Definition
It is unrelated to the TP's trade or business either when it was created or when it became worthless.
-The nature of the debt depends upn whether the lender was engaged in the business of lending money OR whether there is a proximate relationship btwn the creation of the debt and the lender's trade or business
-Loans to relatives & friends are the most common type |
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Term
| What is the maximum amount of net short term capital loss that an individual can deduct agains ordinary income in any one year? |
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Definition
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Term
| With loans between related parties, what are some considerations in determining whether the transaction was a bonafide loan or gift? |
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Definition
1. Was the note properly executed?
2. Was there a reasonable rate of interest?
3. Was collateral provided?
4. What collection efforts were made?
5. What was the intent of the parties? |
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Term
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Definition
-loss is allowed when they become completely worthless
-treated as Capital Loss, deemed to have happened on the last day of the year so that they may be classified as Long Term
-$3,000 Cap Loss Limit |
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Term
Small Business Stock (Section 1244) |
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Definition
-loss can arise from sale of stock or from it becoming worthless
-exception to cap loss, sect 1244 may enable an ordinary loss
-1244 may be common or preferred
-Only individuals who acquired the stock from the corporation are eligible to rec. ordinary loss treatment under Sec 1244
-The corp. must meet certain req's to qualify for ordinary treatment. Main one- the total amount of money and other property rec'd by the coportaion for stock as a contribution to capital does not exceed $1 million |
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Term
| The ordinary loss treatment for section 1244 stock is limited to what amounts per year? |
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Definition
Single- $50,000
Married filing jointly- $100,000
-Losses in excess of these statutory limits receive capital loss treatment
-Ordinary treatment only applies to losses, gains are still treated as Capital Gains. |
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Term
| What losses may an individual deduct under section 165(c)? |
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Definition
-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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Term
| When may a TP deduct losses In regards to property? |
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Definition
If it is used in the TP's trade or business OR
used in a transaction entered into for profit
Ex. include: loss on property used in a proprietorship, a loss on property held for rent, or a loss on stolen bearer bonds |
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Term
| What is included in the term Other Casualty? |
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Definition
It means casualties analogous to fire, strom, or shipwreck.
It also includes accidental loss of property, if it qualifes under the same rules as any other casuality |
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Term
| Casualties must result from an event that is: |
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Definition
1. identifiable
2. damaging to property
3. sudden, unexpected, and unusual in nature
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Term
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Definition
| Sudden- an event that is swift and precipitous and not gradual or progressive |
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Term
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Definition
| an event that is extraodinary and nonrecurring and does not commonly occur during the activity in which the TP engaged when the destruction occured |
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Term
| Define: an Unexpected Event |
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Definition
| an even that is ordinarily unanticipated and occurs without the intent of the individual who suffers the loss |
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Term
| Weather that causes damage must be |
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Definition
Unusual and severe for the particular region.
-Damage must be to the TP's property to qualify as a casualty loss. |
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Term
| When can a TP take a deduction for casualty loss from an automobile accident? |
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Definition
| Only if the damage was not caused by the taxpayer's willful act or willful negligence |
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Term
| If a landslide destroyed a neighbors home, causing my home to decline in value, would I be allowed a loss deduction? |
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Definition
No loss is allowed where a TP's home declined in value because it had no actual damage to the TP's home.
*side note* a TP was allowed a loss for actual flood damage to his property but not for the decline in mkt value due to the property being flood-prone. |
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Term
| What is included in the term theft? |
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Definition
includes, but not necessarily limited to: larceny, embezzlement, and robbery. Theft does NOT include misplaced items.
-Deducted in the year of discovery not the year of theft (unless it's the same year) |
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Term
| When are casualties generally deducted? |
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Definition
In the year loss occurs.
Loss is not permitted if a reimbursement claim with a reasonable prospect of full recovery exists. |
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Term
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Definition
The TP may elect to treat the loss as having occurred in the taxable year immediately preceding the taxable year in which the disaster actually occurred.
Disaster loss also applies in the case of a personal residence that has been rendered unsafe for use as a residence because of a disaster.
The provision applies if within 120 days of the president designating it as a disaster area, the state or local govt orders the TP to demolish or relocate the residence. |
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Term
| Business property or prop held for the production of income is completely destroyed, the loss is equal to: |
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Definition
| The adjusted basis of the property at the time of destruction |
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Term
Business property with partial destruction and
Personal property with partial or complete destruction
The loss is the lesser of the following: |
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Definition
Lesser of:
1. The adjusted basis of the property
2. The FMV of the property before the event Minus the FMV after the event
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