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Agenda 3/8 BA 128A. 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

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agenda 3 8 ba 128a
Agenda 3/8 BA 128A
  • 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 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
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 loss1
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 property- ordinary loss. Amount of loss = adjusted basis of property
transactions result in loss2
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
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 loss1
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 loss2
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
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 Personal

Total destruction adjusted basis smaller of

adjusted Basis or reduction in FMV

Partial destruction smaller of

--------> ad. Basis or <------------ reduction in FMV

casualty loss1
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 loss2
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
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
  • 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
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
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 expenses1
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
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 expenses1
Other expenses
  • Moving expenses - for employees and self-employed 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 expenses2
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
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
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
  • 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