ch08 Losses and Bad Debts.ppt

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
Determine when a taxpayer has materially participated in a passive activity
Identify and calculate the deduction for a casualty or theft pute the deduction for a bad pute 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
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)
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 e 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
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