4. This question is worth 12 points. Gabriela is single and had the following it
ID: 2519044 • Letter: 4
Question
4. This question is worth 12 points. Gabriela is single and had the following items for 2017: Salary $103,000 (110,000) (10,000) 75,000 (9,000) Loss on sale of S 1244 small business stock acquired 3 years ago* Stock acquired 2 years ago became worthless during the year* Long-term capital gain Nonbusiness bad debt* Gabriela had a car accident during the year in which her car was completely destroyed. At the time of the accident, the car had a fair market value of $40,000 and an adjusted basis of $30,000. She used the car 100% of the time for personal use. She received an insurance recovery of $20,000. 1. Provide a detailed calculation of the couple's AGI. Your answer must (a) explain the rule for $ 1244 small business stock and how it applies to the facts; (b) show a detailed netting of capital items; (c) explain the rule for worthless stock; (d) explain the rule for the tax treatment of nonbusiness bad debts. 2. (a) What is the rule for calculating the amount of the casualty loss? (b) Apply the rule to the facts and show a detailed calculation of the loss. (c) Which schedule does the casualty loss appear on?Explanation / Answer
STEP1: As per rule under section 1244 for small business stock and how it applies to the facts:
General rule
In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss.
Maximum amount for any taxable yearFor any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed—
(1)
$50,000, or
(2)
$100,000, in the case of husband and wife filing joint return for that year unde section 6013.
STEP2: Detailed netting of capital items:
Long term capital gainl = 75000
Less: Deductible losses maximum 50000 limit
-loss on sale of 1244 small business stock =(50000)
-loss on worthless stock limited to3000 =(3000)
Netting of capital items = 22000
STEP3:Rule for worthless stock :
A loss is allowed for securities that become completely worthless during the year (worthless securities).5 Such securities are shares of stock, bonds, notes, or other evidence of indebtedness issued by a corporation or government. The losses generated are treated as capital losses deemed to have occurred on the last day of the taxable year. By treating the loss as having occurred on the last day of the taxable year, a loss that would otherwise have been classified as short term (if the date of worthlessness was used) may be classified as a long-term capital loss. Capital losses may be of limited benefit due to the $3,000 capital loss limitation.
STEP4:Rule for tax treatment of non business baddebts:
Nonbusiness Bad Debts - All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You can't deduct a partially worthless nonbusiness bad debt.
A debt becomes worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid. To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt. It's not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You don't have to wait until a debt is due to determine that it's worthless.
Report a nonbusiness bad debt as a short-term capital loss on Form 8949.pdf, Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It's subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. The statement must contain: a description of the debt, including the amount and the date it became due; the name of the debtor, and any business or family relationship between you and the debtor; the efforts you made to collect the debt; and why you decided the debt was worthless.
STEP5:Ruel for calculating the casuality loss:
A sudden event is one that is swift and precipitous and not gradual or progressive. An unexpected event is an event that is ordinarily unanticipated and occurs without the intent of the individual who suffers the loss. An unusual event is one that is extraordinary and nonrecurring and does not commonly occur during the activity in which the taxpayer was engaged when the destruction occurred.8 Examples include hurricanes, tornadoes, floods, storms, shipwrecks, fires, auto accidents, mine caveins, sonic booms, and vandalism. Weather that causes damages (drought, for example) must be unusual and severe for the particular region. Damage must be to the taxpayer’s property to qualify as a casualty loss.
STEP7:Detailed calculaton of total loss as follows during 2017:
loss from small business stock (110000-50000) = 60000
loss from worthless stock (10000-3000) = 7000
non business baddebt = 9000
loss on car accident destroyed (wdv 30000-20000 insurance
recovery ) = 10000
TOTAL LOSS = 86000
note 1: loss from worthless stock of 7000 + loss from small business stock under 1244 rule of 60000 shall be carryforwarded to the next year.
STEP8: Rule for casuality loss :
Claiming the Loss
Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A.pdf, Itemized Deductions, (or Schedule A in Form 1040NR.pdf, if you're a nonresident alien). For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you've subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year. Report casualty and theft losses on Form 4684.pdf, Casualties and Thefts. Use Section A for personal-use property and Section B for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer to Publication 584-B.pdf, Business Casualty, Disaster, and Theft Loss Workbook. These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records.
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