Transcript Chapter 1- Instructor PowerPoint Slides. Summer, 2008

Chapter 7.
Losses-Deductions and Limits-2013
T13F-Chp-07-1-Losses-Deductions and Limits-2013
Part 1. Introduction
Part 2. Annual Losses
Trade or Business,
Rental Activities
Part 3. Losses, Loss Carryovers
NOL, Tax Shelters (Passive Losses)
Part 4. Trade or Business Losses
Operating losses,
Business casualty or theft losses
Part 5. Investment related losses
Capital losses (individuals and corp),
Small business stock,
Related party losses, Wash sales
Part 6. Losses on Personal use items (Casualties)
Losses: Deductions, Limits.
Annual Losses
Summary
Net Op. Losses
Acct Methods
Shelters-Overview
Net Op. Loss
At-Risk Rules
At-Risk limits
Passive Activity
Passive Losses
Transaction Loss
Casualty & Theft
Trade or Bus Loss
Invest.-Losses
Investment Losses
1244 losses
Definition of Losses
• Annual (Activity) Losses
result when an entity’s
deductions for the period
exceed its income
• Transaction Losses result
from disposition of an asset
General Scheme for
Figure 7-1
Treatment of Losses
Realized loss
Transaction loss
Annual loss
Trade or
business
loss
Passive
Activity
Trade or
business
loss
Investmentrelated
loss
Personal
use
loss
NOL
deduction
Loss allowed
or loss
deduction
suspended
Ordinary
loss
Capital
loss
limitations
Nondeductible
Annual Loss
Trade or Bus.
Rental Prop.
Loss Carryovers
NOL
Shelter Losses
At-Risk
Passive Losses
Active particpation
Annual Losses: Net Operating Loss
• Incurred in trade or business operations
– Caused by business expenses
– May not be caused by investment or personal
expenses
• Treatment
– No tax in year NOL occurs
– Carry-back 2 years (But consider 2009 law)
– Carry-forward unused NOL 20 years
• May elect to forego carry-back
Owner of C Corp. has asked for advice.
Corporation was started in 2011
Actual Actual Actual Plan
Amounts ($000)
Revenue
Expenses
Taxable income (loss)
2011
$100
2012
2013
2014
$200
$200
$300
(98)
(173)
(225)
(225)
$2
$27
($25)
$75
1. Can the corp. benefit from the loss in 2013?
2. Is there a choice regarding the 2013 loss?
3. Compute the savings under two options.
4. How do you apply present value methods here?
Annual Losses: Tax Shelter Losses
Tax shelters are activities designed
to minimize the effect of tax on
wealth accumulation.
Dominant business purpose is lacking
• Primary motivation is tax reduction
• Are often vehicles for tax law abuse
Study the information given on the building
on the preceding page. Assume the owner
only pays interest on the mortgage.
What is gain or loss on sale of the building, if
it is sold on 1-1-Yr2, for $500,000?
What happens to the taxable loss from Yr 1?
We will also consider what happens if the
value of the building declines over the
period of ownership.
You can lose from operations and from
selling the property for less than basis.
T/P buys Rental Building on 1-1-Yr-1
Cost
1/1/Yr-1 $400,000
Mortgage 10%
$400,000
Value of Build. 1/1/Yr-1 $400,000
Value of Build. 12/31/Yr-1 $500,000
Rent Revenue
Depreciation
Interest Expense
Taxes,insurance
Taxable Income (loss)
Economically - Is there a loss?
What is gain on sale of building, if it
is sold on 1-1-Yr2, for $500,000?
T/P buys Rental Building on 1-1-Yr-1
Cost
1/1/Yr-1 $400,000
Mortgage 10%
400,000
Value of Build.
1/1/Yr-1
400,000
Value of Build. 12/31/Yr-1
500,000
Rent Revenue
$60,000
Depreciation
(10,000)
Interest Expense
(40,000)
Taxes,insurance
(15,000)
Taxable Income (loss)
($5,000)
Economically - Is there a loss?
What is gain on sale of building, if it is sold
on 1-1-Yr2, for $500,000? (No Yr2 deprec.)
Assume Taxpayer owns the building for
exactly 4 years and in each year the
income statement looks like the one on
the preceding slide.
After 4 years (12-31-Yr-4), Taxpayer sells
the building for $350,000.
Taxpayer has been paying interest only.
What is the gain or loss on the building?
What happens to 4 years of losses?
Yr-1
Yr-2
Yr-3
Yr-4
Rent Revenue
$60,000
$60,000
$60,000
$60,000
Depreciation
(10,000)
(10,000)
(10,000)
(10,000)
Interest Expense
(40,000)
(40,000)
(40,000)
(40,000)
Taxes, insurance
(15,000)
(15,000)
(15,000)
(15,000)
Loss(Suspended)
($5,000)
($5,000)
($5,000)
($5,000)
Building Basis
$390,000
$380,000 $370,000 $360,000
What is total cash inflow (after expenses) in 4 years?
T/P sells building for $350,000 at end of Yr. 1.
T/P Sells Rental Build. on 12-31-Yr-4
Cost
1/1/Yr-1 $400,000
Accum. Deprec.
Book Value
($40,000)
12/31/Yr-4 $360,000
Selling Price
Loss-sale of Bldg.
Operating loss
$350,000
12/31/Yr-4
Year - 4
Suspended Loss Three yrs.
Total loss
T/P Sells Rental Build. on 12-31-Yr-4
Cost
1/1/Yr-1 $400,000
Accum. Deprec.
Book Value
($40,000)
12/31/Yr-4 $360,000
Selling Price
$350,000
12/31/Yr-4
($10,000)
Year - 4
($5,000)
Suspended Loss Three yrs.
($15,000)
Total loss
($30,000)
Loss-sale of Bldg.
Operating loss
T/P Sells Rental Build. on 12-31-Yr-4
Four Year Cash Flow Analysis
Annual revenue
Selling price
Cash inflows
Interest Expense
Taxes, Insurance
Cost of property
Cash outflows
Excess outflow
T/P Sells Rental Build. on 12-31-Yr-4
Four Year Cash Flow Analysis
Annual revenue
$240,000
Selling price
350,000
Cash inflows
590,000
Interest Expense
Taxes, Insurance
Cost of property
Cash outflows
Excess outflow
T/P Sells Rental Build. on 12-31-Yr-4
Four Year Cash Flow Analysis
Annual revenue
$240,000
Selling price
350,000
Cash inflows
590,000
Interest Expense
(160,000)
Taxes, Insurance
(60,000)
Cost of property
(400,000)
Cash outflows
(620,000)
($30,000)
Excess outflow
Tax Shelter Losses-At-Risk Rules
• At-Risk Rules disallow the deduction of
artificial losses
– Loss deduction limited to amounts actually “atrisk”
– To determine amounts actually at-risk, take the
amount of cash or other assets contributed
and
• Add debts for which taxpayer is responsible
• Adjust for share of income (loss) from the
activity
• Reduce by amount of withdrawals
Tax Shelter Losses
Passive Activity Loss
• A passive activity is any trade or
business in which the taxpayer
does not materially participate
• Passive Activity Loss Rules disallow
the deduction of passive activity
losses from other forms of income
Types of Income and Losses
• Active: salary and wages of an employee
and income earned from a business in
which the owner/recipient materially
participates
• Portfolio: interest and dividends
• Passive: tax shelter income, income passed
through to limited partners, and income
from other businesses in which
owner/recipient does not materially
participate
Passive Activity Loss
• Taxpayers subject to the limitations:
– All non-corporate taxable entities
– Conduit entity passive losses flow-through to
owners
• Taxpayers not subject to the limitations:
– Publicly held corporations
• PAL can offset active and portfolio income
– Closely held corporations
• PAL can offset active income, but not portfolio
Passive Activity Loss
General Rules for Limitations
• Passive activity losses must be
netted against passive activity
income
–Net passive losses are not
deductible
–Net passive gains are reported
with other income
Passive Activity Loss
Exception for Rental Real Estate
• By definition, all rental activities and
limited partnership interests are
passive
• But, taxpayers who materially
participate in rental real estate
business are allowed to offset any
losses against other active or portfolio
income
Passive Activity Loss
Disposition of Passive Activities
• Excess (suspended) losses must be
accounted for in the year of disposition
• Disposition by sale frees the suspended
loss to offset income of any other activity
– First, offsets other passive income
– Second, offsets gain from disposal
– Third, any remaining PAL offsets ordinary
income
Disposition of Passive Activities
• Disposition upon death leaves the passive
activity in the decedent’s estate
– Passive activity with unrealized gain
• Beneficiary takes passive activity with stepped-up
basis
• Released excess loss is deductible against other
income, but
• Any unrealized gain on activity decreases amount
of suspended loss to release
– Passive activity with unrealized loss
• No suspended loss is released
General Loss Limitation
• If a partner’s share of losses
exceeds the partner’s basis
– Partner can only deduct losses to
the extent of basis
– Excess losses are carried forward
(indefinitely) to future years until
there is sufficient basis against
which to deduct the unused losses
Material Participation
• Current activity level
–500 hours or more participation in year
–Participation is substantially all the
activity by all persons
–At least 100 hours and no one else
participates more
–At least 100 hours in more than one
activity and aggregate of activities
exceeds 500 hours
Material Participation
• Prior activity level
–Materially participated in 5 of
preceding 10 years
–Materially participated in 3 prior
years in personal service activity
Rental Real Estate Relief
• Taxpayers can qualify for up to $25,000
deduction for rental real estate losses
• Taxpayer must own at least 10% and
actively participate in management
–Set rents, qualify renters, approve repairs
• Deduction phases out for AGIs
between $100,000 and $150,000
Bud is single & received wages of $140,000
from IBM in 2013. Bud is a 50% partner in a
partnership engaged in a rental real estate
activity w/ $60,000 loss for the partnership.
Bud was an active participant in the rental
real estate activity. He had no other income.
How much of the partnership rental loss
may Bud deduct on his 2013 income tax
return? (Sec.
469(i))
a. $0 b. $5,000 c. $15,000 d. $25,000
Bud - Loss from rental activity.
Maximum loss write-off
Threshhold
Phase-out percentage
AGI- above threshhold
Reduction in max loss
Maximum write-off
Bud - Loss from rental activity.
Maximum loss write-off
$25,000
Threshhold
100,000
Phase-out percentage
50%
AGI- above threshhold
40,000
Reduction in max loss
20,000
Maximum write-off
$5,000
Real Property
Business Exception
• Taxpayers must spend more
than half their time in real
property businesses in which
they materially participate and
time spent equals or exceeds
750 hours
A taxpayer has this income
(losses) for the current year:
Active Income
$43,000
Portfolio Income
$29,000
Passive Income
$(27,000)
What is the taxpayers taxable
income (loss) if:
T/P is single individual & passive
income is not from rental?
An individual cannot deduct
passive losses against active or
portfolio income. The individual
taxpayer has taxable income of
$72,000 ($43,000 + $29,000) and
a suspended loss of $27,000.
T/P is a single individual and the passive
income results from a rental activity for
which the taxpayer fails to qualify as a
real estate professional?
Individual - active participant in a rental
real estate activity - is allowed to deduct
up to $25,000 of losses from rental
activities against active and portfolio
income. The taxable income is $47,000
($43,000 + $29,000 - $25,000).
T/P is single and the passive income
results from a rental activity for which the
taxpayer qualifies as a real estate
professional?
An individual who qualifies as real
estate professional can deduct all losses
from the activity against active and
portfolio income. The taxable income is
$45,000 ($43,000 + $29,000 - $27,000).
Laura owns a commercial
office building. She spends
more than 500 hours a year
managing the building. She
also spends 1,700 hours
working in her own real
estate development firm.
Laura qualifies as a real estate professional.
She spends more than 50% of her personal
service time in a real property trade or
business, the amount of time spent in the
real property trade or business is greater
than 750 hours, and she materially
participates in the rental activity (i.e., spends
greater than 500 hours managing the rental
activity). Because she qualifies as a real
estate professional, office building is not
passive activity.
Assume the same facts as in
preceding slide, except that Laura
hires a full-time manager for the
commercial office building. She
spends 75 hours meeting with the
manager and reviewing the operations.
The office building is a passive
activity. Because Laura does not
spend more than 500 hours managing
the rental property, she does not
qualify as a real estate professional.
Bus. Losses
Invest. losses
Casualty,Theft
Transaction Losses
Transaction losses
result from the
disposition of business,
investment or
personal-use assets.
Transaction Losses:
Trade or Business Losses
• Business casualty and theft losses
result from damage caused by a
sudden, unexpected and/or unusual
event
–For property fully destroyed, deduct the
adjusted basis less insurance recovery
–For property partially destroyed, deduct
lesser of the property’s adjusted basis, or
the decline in the property’s value
Involuntary Conversions
• An involuntary conversion results from
– Theft – embezzlement, larceny and robbery
(but not simply losing items)
– Casualty – requires a sudden, unexpected,
and unusual event such as a fire, flood,
tornado, hurricane or vandalism
– Condemnation – lawful taking of property
for its fair market value by a government
under the right of eminent domain
Casualties and Thefts
• Gains and losses sustained on
casualties and thefts are not under a
taxpayer’s control so they receive
special tax treatment
–Allowable losses (including personal
losses) are immediately deductible
–Gains (due to receipt of insurance
proceeds) may be deferred if all
insurance proceeds are used to repair
the damaged property or to acquire
qualifying replacement property
Casualty and Theft Losses
•
Partial destruction of Business or Investment
Property–
Loss limited to the lesser of:
1.
2.
3.
•
Decline in fair market value (or repair costs to
restore property to pre-casualty condition)
The adjusted basis of the property
Complete Destruction of Business Property
For business property that is completely
destroyed, the loss is always the property’s
adjusted basis.
The loss computed above is then reduced by
any insurance proceeds received
Business asset-Partial Destruction
FMV before fire
$300,000
FMV after fire
200,000
Decline in value
100,000
Cost basis
150,000
< of decline or basis
Ins. proceeds
Deductible loss
Loss: cost to repair or value decline?
What if ending FMV was $40,000?
Business asset-Partial Destruction
FMV before fire
$300,000
FMV after fire
200,000
Decline in value
100,000
Cost basis
150,000
< of decline or basis
100,000
Ins. proceeds
0
Deductible loss
$100,000
Loss: cost to repair or value decline?
What if ending FMV was $40,000?
Casualty &Theft Loss Deductions
• Thefts are deductible in year of discovery
• For casualties in designated disaster areas,
taxpayer can elect to deduct loss in preceding
year
• A net business loss is deducted from ordinary
income; an investment loss is an itemized
deduction
• Individuals have additional limits on losses from
personal-use property:
– $100 floor per casualty (per event)
– 10% of AGI threshold
– Must itemize to deduct loss
Jim's business building was totally destroyed
by fire. The property had an
adjusted basis of $150,000 and
a FMV of $130,000 before the fire.
Jim received insurance
reimbursement of $120,000 for the
destruction of the workshop.
Jim's AGI was $70,000, before considering
this loss.
Jim had no casualty gains during the year.
What is Jim’s fire loss deduction on his tax return?
a. $ 2,900 b. $ 8,500 c. $ 30,000
Business asset
Jim
Adjusted gross income
$70,000
FMV before the casualty 130,000
FMV after the casualty
0
Decline in value
Cost basis
Insurance proceeds
Loss
Business asset
Adjusted gross income
FMV before the casualty
FMV after the casualty
Decline in value
Cost basis
Insurance proceeds
Loss
Jim
$70,000
130,000
0
130,000
150,000
120,000
$30,000
If not insured, deduct basis-$150,000
Gains on Involuntary Conversions
• If the insurance recovery on a
casualty or theft is greater than
the loss, the taxpayer has a gain
• Condemnations usually result in
gain because proceeds received
are usually fair market value
Gains on Involuntary Conversions
• If all proceeds are used to acquire qualified
replacement property (or repair the
property to its pre-casualty condition)
within the required replacement period,
the gain is deferred
• Gain may have to be recognized if all
proceeds are not used to acquire
replacement property (or make repairs to
the damaged property) within the required
time period
Investment losses
Capital losses
Small bus. stock
Related Party
Wash sales
Transaction Losses:
Investment-Related Losses
• Net capital losses result from netting
short-term and long-term capital gains
and losses
–Individual taxpayers may deduct only
$3,000 annually
–Corporate taxpayers may not deduct any
net capital loss
• Carry-back for 3 years, then forward for 5
Transaction Losses:
Investment-Related Losses
• Losses on Small Business Stock may be
deducted up to $50,000 per person ($100,000
per married couple) per year
– Small business = a corporation with
capitalization of less than $1 million
– Stock must have been bought directly from
corporation
– Excess over $50,000 ($100,000) is netted with
other capital gains and losses
Transaction Losses:
Investment-Related Losses
• Losses on Related Party Sales are
disallowed because they generally fail
the arm’s length transaction concept
–Loss is carried forward with the property
• Gain from later sale may be offset by
deferred loss
• Loss cannot be created or increased by
using the deferred loss
Transaction Losses:
Investment-Related Losses
• Wash Sale losses are disallowed because
the sale violates the substance-over-form
doctrine
– A wash sale occurs when a security is sold at
a loss, and during +/- 30 days of the sale the
seller buys substantially identical securities
– Disallowed loss amount is added to the basis
of the replacement security
Section 1244 Stock
• Losses on stock are usually capital losses;
individuals are limited to a $3,000 deduction
against ordinary income annually after netting
losses against capital gains
• Section 1244 permits an ordinary loss
deduction of up to $50,000 ($100,000 if a joint
return) annually for losses on qualified stock if
an individual is the original investor in a
domestic small business corporation
• Any excess loss is a capital loss
Section 1244 Stock
• Total capitalization cannot exceed $1
million
• For the 5 preceding years
– The corporation must be an operating
company deriving 50% or more of its annual
gross revenues from the sale of goods or
services
– Income from rents, royalties, dividends,
interest, annuities and gain on sales of
securities is limited to 50% or less
Section 1244 Stock-2
Vanessa bought 2,000 shares of Barbco
stock when the company was formed
for $107,000. The company had
$900,000 of total capital upon
formation; thus, it qualified as Section
1244 stock. Vanessa sold the stock
three years later for $3,000. If Vanessa
is single, how much and what kind of
gain or loss does she have?
Section 1244 Stock-3
Vanessa has a total loss on the
Section 1244 stock of $104,000
($3,000 – $107,000).
She can treat $50,000 of the loss as
an ordinary loss, deductible from
ordinary income.
The remaining $54,000 loss is a
long-term capital loss.
Section 1244 Stock
She can deduct $3,000 this year as a
capital loss giving her a total deduction
of $53,000 in the current year.
The remaining $51,000 of the longterm capital loss can only be carried
forward and deducted at a rate of
$3,000 per year after offsetting other
net capital gains in future years.
In April 2013, Pam sold stock with a
cost basis of $15,000, to Lisa, her
sister, for $12,000.
In September 2013, Lisa sold the
same shares of stock to her
neighbor, Niki, for $20,000.
What is Pam's loss for 2010?
a. $6,000 b. $5,000 c. $1,000 d. $10,000
Sale to Relative
Pam's Selling price
(received from Lisa)
$12,000
Pam's Basis
15,000
Pam's Gain (loss) realized
(3,000)
Pam's Gain (loss) recognized
Loss on related party sale not deductible.
Sale to Relative
Pam's Selling price
(received from Lisa)
$12,000
Pam's Basis
15,000
Pam's Gain (loss) realized
(3,000)
Pam's Gain (loss) recognized
$0
Loss on related party sale not deductible.
In April 2013, Pam sold stock with
a cost basis of $15,000, to Lisa, her
sister, for $12,000.
In September 2013, Lisa sold the
same shares of stock to her
neighbor, Niki, for $20,000.
What isLisa's gain for 2010?
a. $6,000 b. $5,000
c. $1,000 d. $10,000
Sale at gain after disallowed
loss on sale by relative
Selling Price received by Lisa
Basis to Lisa
Gain realized by Lisa
$20,000
12,000
8,000
Less Loss Disallowed earlier
on sale by Pam
Gain recognized by Lisa
(3,000)
$5,000
Wash Sales
• Wash sale - identical securities acquired
within 30 days before or after the sale
date (a 61-day period)
– Wash sale losses are disallowed but gains are
taxed
– Loss is deferred by adding disallowed loss to
basis of new shares
– If more stock is sold than is purchased within
the 61-day period, only a portion of the loss
representing the repurchased stock is
deferred
Ms. Rich had these transactions in GM Corp. stock.
Date
Event
No. of
Total
Shares
Amount
01/02/01 Bought:
4,000 Cost
$20,000
12/31/13 Sold:
4,000 Sell. Price
$12,000
01/02/13 Bought:
2,000 Cost
$6,000
How much loss may she deduct for 2013?
What is the basis of the stock bought in 2013?
Wash Sale
Moore bought 2,000 shares of VBT stock over the
Internet on January 2 of year 4 for $50,000. On
December 28 of year 3, his broker sold 3,000
shares of VBT for $85,000 that she had been
holding in Moore’s account.
This stock had been purchased in year 1 for
$100,000.
What is Moore’s realized and recognized gain or
loss?
What is his basis in the stock purchased on
January 2?
Wash Sale
The sale of the stock by the broker yields a $15,000
($85,000 - $100,000) realized loss, but only $5,000 is
recognized.
Moore cannot recognize two-thirds of the loss due to his
purchase of 2,000 shares in January after the loss on the
sale of 3,000 shares in December due to the wash sale
rules.
The disallowed loss of $10,000 (2/3 x $15,000 total loss)
is added to the basis of the 2,000 shares purchased in
January for a total basis for those shares of $60,000
($50,000 + $10,000).
LossesPersonal
use items
Transaction Losses:
Personal Use Losses
• Losses from the disposition of
personal use assets are
generally not deductible
• Exception exists for personal
casualty and theft losses
Casualty and Theft Losses
• Partial or complete destruction of
Personal use Property–
Loss limited to the lesser of:
1.
2.
Decline in fair market value (or repair
costs to restore property to pre-casualty
condition)
The adjusted basis of the property
• The loss computed above is then
reduced by any insurance proceeds
received
Transaction Losses:
Personal Casualty and Theft Losses
Loss is the lesser of
The property’s adjusted basis, or
The decline in FMV of the property (repair cost)
Loss cannot be more than FMV before event
Loss is reduced by
Insurance proceeds received,
$100 per event (Administrative convenience),
and
10% of AGI per year
John bought a family auto for
$20,000.
After 10 years of family use, the
auto is worth $6,000.
It is totally destroyed by a storm
and it is not insured.
John’s AGI is $50,000.
What is the loss deduction?
Taxpayer:
Adjusted gross income
FMV before the casualty
FMV after the casualty
Decline in value
Cost basis
Lesser of cost or decline
Insurance proceeds
10% of AGI
$100 floor
Deduction
John
$50,000
6,000
0
6,000
20,000
6,000
0
6,000
(5,000)
(100)
$900
Jane's residence was totally destroyed by
fire. The property had an adjusted basis of
$150,000 and a FMV of $130,000 before the
fire. Jane received insurance reimbursement
of $120,000 for the destruction of her home.
Jane's adjusted gross income was $70,000.
Jane had no casualty gains during the year.
What amount of the fire loss was Jane
entitled to claim as an itemized deduction on
her tax return?
a. $ 2,900 b. $ 8,500 c. $ 8,600 d. $10,000
Personal asset - totally destroyed.
Adjusted gross income
$70,000
FMV before the casualty
130,000
FMV after the casualty
0
Decline in value
130,000
Cost basis
150,000
Lesser of cost or decline
130,000
Insurance proceeds received
120,000
Loss after Ins. Proceeds
10% of AGI
$100 floor
Deduction
Personal asset - totally destroyed
Adjusted gross income
$70,000
FMV before the casualty
130,000
FMV after the casualty
0
Decline in value
130,000
Cost basis
150,000
Lesser of cost or decline
130,000
Insurance proceeds received
120,000
Loss after Ins. Proceeds
10,000
10% of AGI
(7,000)
$100 floor
Deduction
(100)
$2,900
Asset Type
Business
1 Adjusted gross income
N/A
2 FMV before casualty
170,000
3 FMV after casualty
30,000
4 Decline in value (or repair cost?)
140,000
5 Cost basis
150,000
6 Lesser of line 4 or 5
140,000
7 Loss before insurance
140,000
8 Insurance proceeds received
80,000
9 Loss or (gain if insurance greater)
60,000
10 10% of AGI
11 $100 floor
12 Deduction
Case 1 may involve repair costs of $140,000.
Personal
70,000
170,000
30,000
140,000
150,000
140,000
140,000
80,000
60,000
(7,000)
(100)
$52,900
Casualty
Complete Destruction
3
Business
N/A
90,000
0
90,000
100,000
90,000
100,000
80,000
20,000
Asset type
1 Adjusted gross income
2 FMV before casualty
3 FMV after casualty
4 Decline in value (repair?)
5 Cost basis
6 Lesser of line 4 or 5
7 Loss before insurance
8 Insurance proceeds
9 Loss or (gain)
10 10% of AGI
11 $100 floor
12 Deduction
Case 1 may involve repair costs of $140,000.
4
Personal
70,000
90,000
0
90,000
100,000
90,000
90,000
80,000
10,000
(7,000)
(100)
$2,900
Casualty
Partial Dest.
Complete Dest.
1
2
3
4
Asset type
Business Personal Business Personal
1 Adjusted gross income
N/A
70,000
N/A
70,000
2 FMV before casualty
170,000 170,000
90,000
90,000
3 FMV after casualty
30,000
30,000
0
0
4 Decline in value
140,000 140,000
90,000
90,000
5 Cost basis
150,000 150,000 100,000 100,000
6 Lesser of line 4 or 5
7 Loss before insurance
8 Insurance proceeds
80,000
80,000
80,000
80,000
9 Loss or (gain)
10 10% of AGI
11 $100 floor
12 Deduction
Case 1 may involve repair costs of $140,000.
Casualty
Partial Destruction
1
2
Asset type
Business
1 Adjusted gross income
N/A
2 FMV before casualty
170,000
3 FMV after casualty
30,000
4 Decline in value (repair?)
140,000
5 Cost basis
150,000
6 Lesser of line 4 or 5
140,000
7 Loss before insurance
140,000
8 Insurance proceeds
80,000
9 Loss or (gain)
60,000
10 10% of AGI
11 $100 floor
12 Deduction
Case 1 may involve repair costs of $140,000.
Personal
70,000
170,000
30,000
140,000
150,000
140,000
140,000
80,000
60,000
(7,000)
(100)
$52,900
Casualty
Partial Destruction
1
2
Asset type
Business Personal
1 Adjusted gross income
N/A
70,000
2 FMV before casualty
170,000 170,000
3 FMV after casualty
30,000
30,000
4 Decline in value
140,000 140,000
5 Cost basis
150,000 150,000
6 Lesser of line 4 or 5
140,000 140,000
7 Loss before insurance 140,000 140,000
8 Insurance proceeds
80,000
80,000
9 Loss or (gain)
60,000
60,000
10 10% of AGI
(7,000)
11 $100 floor
(100)
12 Deduction
$52,900
Case 1 may involve repair costs of $140,000.
Complete Destruction
3
Business
N/A
90,000
0
90,000
100,000
90,000
100,000
80,000
20,000
4
Personal
70,000
90,000
0
90,000
100,000
90,000
90,000
80,000
10,000
(7,000)
(100)
$2,900
The End