Chapter 7Business Bad Debts (slide 1 of 3)Business Bad Debts (slide 2 of 3)Business Bad Debts (slide 3 of 3)Nonbusiness Bad Debts (slide 1 of 2)Nonbusiness Bad Debts (slide 2 of 2)Classification of Bad DebtsWorthless Securities (slide 1 of 2)Worthless Securities (slide 2 of 2)Section 1244 Stock (slide 1 of 3)Section 1244 Stock (slide 2 of 3)Section 1244 Stock (slide 3 of 3)Losses of IndividualsDefinition of Casualty & Theft (C & T)Definition of TheftWhen Casualty & Theft Is DeductibleEffect of Claim for ReimbursementAmount of C&T DeductionAmount of Nonpersonal C&T LossesC&T ExamplesNonpersonal C&T LossesNonpersonal C&T GainsPersonal C&T GainsPersonal C&T LossesExample of C&T Limitation (slide 1 of 2)Example of C&T Limitation (slide 2 of 2)Research and Experimental Expenditures (slide 1 of 2)Research and Experimental Expenditures (slide 2 of 2)Net Operating Losses (slide 1 of 3)Net Operating Losses (slide 2 of 3)Net Operating Losses (slide 3 of 3)PowerPoint PresentationChapter 7Chapter 7Deductions and Losses: Certain Business Expenses and LossesDeductions and Losses: Certain Business Expenses and LossesCopyright ©2004 South-Western/Thomson LearningCopyright ©2004 South-Western/Thomson LearningEugene Willis, William H. Hoffman, Jr.,Eugene Willis, William H. Hoffman, Jr.,David M. Maloney and William A. RaabeDavid M. Maloney and William A. RaabeC6 - 2Business Bad Debts (slide 1 of 3)Business Bad Debts (slide 1 of 3)•Specific charge-off method must be used–Exception: Reserve method is allowed for some financial institutions•Deduct as ordinary loss in the year when debt is partially or wholly worthless–Cash basis taxpayer does not have bad debt deduction for unpaid receivables•Specific charge-off method must be used–Exception: Reserve method is allowed for some financial institutions•Deduct as ordinary loss in the year when debt is partially or wholly worthless–Cash basis taxpayer does not have bad debt deduction for unpaid receivablesC6 - 3Business Bad Debts (slide 2 of 3)Business Bad Debts (slide 2 of 3)•Example: –Ted uses the accrual method of accounting•Ted sells inventory on account for $1,150–Buyer pays $150 down and makes no other payments•Ted has $1,000 bad debt deduction•Example: –Ted uses the accrual method of accounting•Ted sells inventory on account for $1,150–Buyer pays $150 down and makes no other payments•Ted has $1,000 bad debt deductionC6 - 4Business Bad Debts (slide 3 of 3)Business Bad Debts (slide 3 of 3)•Example: –Tara uses the cash method of accounting•Tara performs accounting services for $1,150–Client pays $150 down and makes no other payments•Tara has no bad debt deduction•Example: –Tara uses the cash method of accounting•Tara performs accounting services for $1,150–Client pays $150 down and makes no other payments•Tara has no bad debt deductionC6 - 5Nonbusiness Bad Debts (slide 1 of 2)Nonbusiness Bad Debts (slide 1 of 2)•Specific charge-off method must be used•Deduct as short-term capital loss in the year when amount of worthlessness is known with certainty–No deduction is allowed for partial worthlessness of a nonbusiness bad debt•Specific charge-off method must be used•Deduct as short-term capital loss in the year when amount of worthlessness is known with certainty–No deduction is allowed for partial worthlessness of a nonbusiness bad debtC6 - 6Nonbusiness Bad Debts (slide 2 of 2)Nonbusiness Bad Debts (slide 2 of 2)•Related party (individuals) bad debts are generally suspect and may be treated as gifts•Related party (individuals) bad debts are generally suspect and may be treated as giftsC6 - 7Classification of Bad DebtsClassification of Bad Debts•Individuals will generally have nonbusiness bad debts unless:–In the business of loaning money, or –Bad debt is associated with the individual’s trade or business •Determination is made either at the time the debt was created or when it became worthless•Individuals will generally have nonbusiness bad debts unless:–In the business of loaning money, or –Bad debt is associated with the individual’s trade or business •Determination is made either at the time the debt was created or when it became worthlessC6 - 8Worthless Securities (slide 1 of 2)Worthless Securities (slide 1 of 2)•Loss on worthless securities is deductible in the year they become completely worthless–These losses are capital losses deemed to have occurred on the last day of the year in which the securities became worthless•Loss on worthless securities is deductible in the year they become completely worthless–These losses are capital losses deemed to have occurred on the last day of the year in which the securities became worthlessC6 - 9Worthless Securities (slide 2 of 2)Worthless Securities (slide 2 of 2)•Example of worthless securities–On December 1, 2002, Sally purchased stock for $10,000. The stock became worthless on June 1, 2003. Sally’s loss is treated as having occurred on December 31, 2003. The result is a long-term capital loss.•Example of worthless securities–On December 1, 2002, Sally purchased stock for $10,000. The stock became worthless on June 1, 2003. Sally’s loss is treated as having occurred on December 31, 2003. The result is a long-term capital loss.C6 - 10Section 1244 Stock(slide 1 of 3)Section 1244 Stock(slide 1 of 3)•Sale or worthlessness of § 1244 stock results in ordinary loss rather than capital loss for individuals–Ordinary loss treatment (per year) is limited to $50,000 ($100,000 for MFJ taxpayers)•Loss in excess of per year limit is treated as capital loss•Sale or worthlessness of § 1244 stock results in ordinary loss rather than capital loss for individuals–Ordinary loss treatment (per year) is limited to $50,000 ($100,000 for MFJ taxpayers)•Loss in excess of per year limit is treated as capital lossC6 - 11Section 1244 Stock(slide 2 of 3)Section 1244 Stock(slide 2 of 3)•Section 1244 loss treatment is limited to stock owned by original purchaser •Corporation must meet certain requirements to qualify–Major requirement is limit of $1 million of capital contributions•Section 1244 does not apply to gains•Section 1244 loss treatment is limited to stock owned by original purchaser •Corporation must meet certain requirements to qualify–Major requirement is limit of $1 million of capital contributions•Section 1244 does not apply to gainsC6 - 12Section 1244 Stock(slide 3 of