When taxpayers claim a deduction for a bad debt, it can trigger an audit by the IRS. The IRS has a vested interest in ensuring that taxpayers are not taking advantage of tax laws to reduce their tax liability. As a result, they will closely scrutinize bad debt deductions to ensure that they meet the…
Category: Tax Loss
Tax Loss
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S Corporation Losses Limited by Tax Basis
One of the benefits of Subchapter S corporations is the ability to have losses flow through from the business’ tax return to the individual shareholder’s tax return. These flow-through losses are limited by the shareholder’s tax basis in the S corporation stock. The court recently addressed this limitation in Tinsley v. Commissioner, T.C. Summary Opinion…
Bad Credit Results in No Bad Debt Deduction
When it comes to taking a bad debt deduction, the IRS tends to scrutinize more closely, especially if the loan is from a friend or family member. The courts have developed various factors that they consider in such disputes, including whether the borrower could have secured a loan from a third party. Recently, in Scheurer…
Is a Bad Debt Deduction Triggered by Cease-and-Desist Court Order
Determining the allowable tax year for a loss is a common challenge for taxpayers, often relying on identifying a triggering event. There is very little guidance as to what can qualify as a triggering event for tax purposes. In the case of a cease-and-desist order from a state regulator, does it qualify as a triggering…
Grouping Nonpassive Activities Under the PAL Rules
Taxpayers are often surprised to learn that some losses may not be netted against gains in the current tax year. This is often due to the passive activity loss and material participation rules. The IRS National Office addressed these rules in TAM 201634022, in the context of whether two businesses should be grouped together and…
Tax Deductions for Hobby Survives IRS Scrutiny
There are quite a few cases where the IRS disallowed loss deductions for “hobbies.” There are also quite a few cases where the courts have upheld the IRS’s position. These cases are decided based on the facts and how the courts interpret these facts. The facts in Main v. Commissioner, T.C. Memo. 2016-127, provide a…
NOL Triggers Refund for Earlier Year Adjustments
The tax loss carryback can result in some interesting math. The difficulties come in when one thinks about how to take one number, a loss, from a latter year, and apply that loss back to a former year. This may sound simple enough. It is one number that is being carried back. That part is…
Bad Debt Deduction Not Allowed Until Business Fails
If you lend money to a failing business and the business eventually fails, can you take a bad debt deduction? And if so, when? The U.S. Tax Court addressed this in Cooper v. Commissioner, 143 T.C. 10, which provides an opportunity to consider the question. Facts & Procedural History The Coopers started Pixel in 1983. Pixel…
The Hobby Loss Rules: Planning for Unprofitable Businesses
American culture still has a hint of the protestant work ethic. There are people in the United States who still work hard and are willing to take risks to make things happen. The country benefits if they are successful–particularly if it ends up in a viable commercial venture. Not all ventures end up being successful.…
The Hobby-Loss Grouping Rules
The IRS is not a government agency. It does not have to earn a profit. It does not even have to be concerned about keeping basic books and records. Unlike the standard that it imposes on even the smallest of business taxpayers, the IRS cannot produce anything close to a simple profit and loss statement…