Agenda 3/8 BA 128A
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Questions from lecture
Review Chapter 8 &9
Assignment - I8-42,51,59 I9-51,56
Additional problems - I9-61,69
Losses and Bad Debts
• Losses incurred in investment/trade or
business - generally deductible
• Theft/Casualty loss on personal assets deductible
• Losses on other personal assets - not
deductible
• uncollectible business/non business debt deductible
Transactions result in loss
• Loss in general = excess of adjusted basis
over realized amount, selling costs reduced
amount realized except inventory
(expensed)
• Sale or exchange of property - capital asset
result in capital loss, property in bus/trade
e.g. inventory, accounts receibale,
depreciable property and land used in a
trade or business - ordinary loss (section
1231 subject to netting rules (I13)
Transactions result in loss
• Seizure or confiscated property- treated the
same as sale or exchange, deduction taken
in the year of seizure, gain is realized if
compensation received is > than adj. Basis
• Abandoned property - personal property not
deductible, investment/business propertyordinary loss. Amount of loss = adjusted
basis of property
Transactions result in loss
• Worthless security - decline in value (e.g. to
$1 ) is not worthless, treat loss as incurred
as last day of tax year, generally result in
capital loss except: section 1244 stock ordinary loss; affiliated corp- ordinary loss
• Demolition of property not deductible - add
to basis of land
• Other disallowed loss - wash sales, like kind
exchange, related party transaction, transfer
of property to a controlled corp in exchange
for stock
Passive loss
• Definition - any rental activity or any
trade/business where taxpayer does not materially
participate
• Passive loss can only net against passive income
and can be carried over (pro rata for each activity).
Suspended losses of passive activity is deductible
against ordinary income upon disposition of
property or termination of ownership interest as in
a partnership
• Active income - wages, salaries, active business
income
• Portfolio income - dividends, interest, annuities,
royalties (investment income)
Passive loss
• Determination of the passive nature is done
annually, former passive activity loss can
deduct against ordinary income
• Materially participation (~500 hours of
participation or others I8-11)
• e.g. of passive investment - limited partnership
• Taxpayers subject to passive loss rules individuals, estates, trusts, closely held C-corp
(partial), personal service corporation, publicly
traded partnerships)
Passive loss
• Rental activity excluding real property
trade/business
• $25000 deduct against ordinary income if
actively participates and own at least 10%
of value of activity; loss is subject to 50%
phase out if AGI > $100,000; $25000 apply
to tax credits also.
Casualty loss
• Identifiable event that was sudden, unexpected or unusual
• Theft is included (proper substantiation e.g. police report)
• only allowed to deduct up to adjusted basis
Bus/investment
Total destruction
Partial destruction
adjusted basis
Personal
smaller of
adjusted Basis or
reduction in
FMV
smaller of
--------> ad. Basis or <-----------reduction in
FMV
Casualty loss
• $100 reduction in each casualty. Total loss
is subject to 10% AGI floor
• If casualty gains > casualty loss, capital
gains
• If casualty loss > casualty gains, itemized
deduction subject to 10% floor
• casualty loss on business and investment
property that generate rents or royalties are
for AGI, losses on other investment
property are misc. itemized deduction.
Casualty loss
• Deduction of loss in the year it is sustained
• exception - theft losses (year of discovery),
receipt of insurance or other
reimbursements that are reasonably
expected in a subsequent year, other disaster
losses (declared by US president as disaster
area)
Bad Debts
• Bona fide debtor-creditor relationship - cannot be a gift,
related party transaction; note/written instrument,
definite schedule of payment, reasonable rate of interest
• Has to have a basis in debt
• Debt becomes worthless - business (partial
worthlessness OK, personal - complete worthlessness)
• guaranteed debt, may deduct bad debt, cannot deduct
interest
• Cash method payer - no open item receivable, cannot
deduct bad debt if no note present
• Bus bad debt - ordinary loss
• Personal bad debt - ST capital loss
NOL
• Carry back to get tax refund
• Carry forward to deduct subsequent year
income
• Can elect not to carryback
• Adjust back other deductions
– non-bus capital loss deduction
– non-business deductions e.g. personal
exemption and standard/itemized deduction
Chapter 9 Employee expenses
• Reimbursed employee expenses
– accountable plan - substantiation, excess is
returned to employer - not include in GI and not
deductible, if excess is not return, include in
income
– not accountable plan - include in GI, expenses
deducted as misc. itemized deduction
• Unreimbursed employee expenses deductible from AGI - misc. itemized
deduction
Travel expenses
• Transportation, meals and lodging
• purpose- connected with trade/business and
employment
• taxpayer must be away from “tax” home
overnight or for a sufficient duration to
require rest before return.
• Tax home = location of principal place of
employment.
• Indefinitely and permanently away from
home - not deductible
Travel expenses
• Depends on primary purpose of travel
(personal vs. business - personal not
deductible)
• Non-deductible amounts
– section 212 travel expenses
– education
– luxury water travel limited to 2 nights of per
diem of govt employee
– exceptions - certain 212 is ok, medical expenses
transportation, charitable activity transportation
Other expenses
• Automobile expenses - Actual expenses method (pro rata
for expenses such as gas, oil, repairs, depreciation, interest,
license fees), standard mileage method (32.5 cents a mile)
• Entertainment expenses and meals- 50% deductions,
directly related to business and trade (e.g. business setting,
business benefit derived), associated with expenses (e.g.
business purpose, directly precede/follow a bona fide
business discussion)
• For meals, additional requirements - not extravagant and
lavish
• No deduction for maintenance of entertainment facilities
• Business gifts limit to $25 per donee
Other expenses
• Moving expenses - for employees and selfemployed related to business/trade and
employment
• Distance >=50 miles between old res. And new
job location than old res and former place of
employment
• Duration of employment - full time employment
for 39 weeks during 12 month period after move
• Deduction allowed only for cost of moving
household goods + cost of travelling, not include
house-hunting and other temp living expenses
Other expenses
• Education expenses - only for the pursuit of employment
related/ trade or business
• either to maintain skills required by individual in
employment/trade/business
• Meet lawful requirements to maintain employment status
• Cannot deduct if it’s just to meet minimal education
requirements or if it qualifies for new trade or business
• Office in home - deductible if it is used in a regular basis
as principal place of business and a place for meeting or
dealing with patients, clients or customers. Employee has
to prove that the exclusive use is for the convenience of
the employer; use to maintain admin/mgmt activities ok if
there is no other fixed location where those activities are
held; expenses include direct (supplies) + indirect
(mortgage, real estate taxes) expenses
Deferred Compensation
• Pension plan, profit sharing, stock bonus
plan
• Qualified plans - exclusive for employees,
not discriminating and other vesting and
funding requirements
• Employer can deduct contribution and
employee not taxed on earnings from
contributions until withdrawn
Employee stock option plan
• Incentive stock option
– employer cannot deduct
– option price >= FMV at grant date
– employee cannot sell within two years of grant date and
1 year of exercise date
– not tax consequence at grant/exercise date - LTCG at
selling date
• Nonqualified stock option
– employer can deduct
– employee incur ordinary gain/loss at option and
exercise and capital G/L at disposal
– Table I9-4, if FMV is ascertainable, tax at grant date
otherwise, tax at exercise date
IRA
• Beneficial - earnings grow tax free
• Traditional - may deduct $2000 if not actively participate in
other employer- sponsored retirement plans, otherwise, phase
out amount deductible
• IRA spouse plan, both may deduct $2000 subject to AGI
limitation.
• Penalty if withdraw before 59.5 years old
• Roth IRA, tax benefits come at the end, non deductible,
distribution is not taxable, can deduct up to $2000. Can only
choose Roth or traditional, also phase out
• Traditional IRA rollover to IRA, tax immediately - can spread
over a four year period
• Education IRA - $500 a year for a beneficiary- distributions
not taxable