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ch. 8 Losses and Bad Debts (Casualty and Theft Losses (Casualty defined…
ch. 8 Losses and Bad Debts
Transactions that may result in losses
Sale or Exchange of Property
Expropriated, Seized, Confiscated, or Condemned Porperty
Abandoned Property
Worthless Securities
Demolition of Property
Classifying the Loss on the Taxpayer's tax Return
Ordinary v. Capital Loss
Disallowance Possibilities
Passive Losses
Computation of Passive Losses and Credits
Carryovers
Definition of a Passive Activity
Taxpayers Subject to Passive Loss Rules
Real Estate Businesses
Other Rental Real Estate Activities
Casualty and Theft Losses
Casualty defined
A
deductible casualty loss
is one that occurs in an identifiable event that is sudden, unexpected, or unusual
Identifiable
event: the act of losing or misplacing property is generally not considered a casualty
Sudden, unexpected, or unusual events
a sudden event is swift, not gradual or progressive
an unexpected event is ordinarily unanticipated and not intended
an unusual event is not a day-to-day occurrence and that is not typically of the activity
a taxpayer may
NOT
deduct losses - caused by the taxpayer's
willful negligence or willful act
Deductible casualty loss (E.g.)
rust and water damage to furniture and carpets caused by the bursting of a water heater
Damage to the exterior paint of a residence caused by a severe, sudden, and unexpected concentration of chemical fumes in the air
Loss caused by fire (unless the taxpayer sets the fire, in which case no deduction is available)
Damage to a building caused by an unusually large blast at a nearby quarry or a jet sonic boom
Death of trees just a few days after a sudden infestation of pine beetles
Theft Defined
include theft of business, investment, or personal-use property
include but shall not be limited to larceny (盗窃), embezzlement (盗用；贪污), and robbery (抢劫)
whether the action involves criminal intent and is illegal under the state law where the action has occurred
IRS: blackmail (敲诈), extortion (敲诈勒索), and kidnapping (绑架) for ransom (赎金) may also constitute theft
Deductible Amount of Casualty Loss
depends on:
the amount of the loss sustained
any insurance or other reimbursement the taxpayer received
the limitations imposed on under the tax law (In the case of personal-use-property)
Measuring the Loss (FMV)
by comparing the property's FMV immediately before and immediately after the casualty
may NOT include any reduction in the FMV of the taxpayer's surrounding but
undamaged property
the cost of protecting property
to prevent damage from a casualty is NOT deductible loss
if BUSINESS or INVESTMENT property - the loss is the taxpayer's adjusted basis in the property, even if it is greater than the FMV
if Personal-use property - the loss is the lesser of the reduction in the property's FMV or adjusted basis
If an appraisal is difficult or impossible to obtain - may use the cost of the repairs instead. Repairs must meet
the repairs will bring the property back to its condition immediately before the casualty
the cost of the repairs is not excessive
the repairs do not more than repair the damage incurred in the casualty
the repairs do not increase the value of the property over its value immediately before the casualty
Limitations on Personal-Use Property
Losses sustained in each separate casualty must be reduced by $100 (for property destroyed in the same casualty, only $100 deducted from all the properties)
The total amount of all net casualty losses for personal-use property is reduced by 10% of the taxpayer's AGI for the year.
Netting Casualty Gains and Losses on Personal-Use Property
must net casualty gains and losses incurred during the year on
personal-use assets
The gains and losses are treated as capital gains and losses
Calculation
Gain / Loss
Net gain/loss ($100)
report long-tern or short-term
If casualty losses > gains, must further reduce the net loss by 10% of AGI
Casualty Gains and Losses Attributable to Business and Investment Property (NO $100 or 10% limitation)
Timing of Casualty Loss Deduction
theft losses: must deduct a theft loss in the tax year in which the taxpayer discovers the theft (equitable and practical until a subsequent year
insurance or other reimbursements: must subtract any reimbursement received as compensation for a loss in arriving at the amount of the loss
the taxpayer deducts the loss in the subsequent year
disaster losses: a taxpayer may elect to deduct a casualty loss in the year preceding the year in which the loss actually occurs
allows taxpayers the possibility of receiving financial help sooner from the potential tax refunds by filing an amendment to the prior year's return
Bad Debts
Bona Fide Debtor-Creditor Relationship
Taxpayer's Basis in the Debt
Debt Must Be Worthless
Nonbusiness Bad Debts
Business Bad Debts
Deposits in Insolvent Financial Institutions
Net Operating Losses
Computing the net Operating Loss for Inds.
Carryback and Carryover Periods
Recomputation of Taxable Income in the Carryover Year
Tax Planning Considerations
Bad Debts
Casualties
Net Operating Losses
Compliance and Procedural Considerations
Casualty Losses
Net Operating Losses
Worthless Securities