Deductible Transaction & Casualty Losses in US Taxation

Posted on Aug 1, 2024 in Economy

Chapter 8: Transaction Losses

Deductible if Identifiable Event Occurs

Transaction losses not classified as sale or exchange (ordinary loss)-Dfor

Casualty/Theft Losses – always deductible (only personal use loss that is deductible)

For sales/exchanges and worthless securities, capital assets and 1232 netted

Demolitions – losses added to basis of land

Sec 1244 Stock – ordinary loss (50K(S)150K(MFJ)) if:

• (remaining LTCL netted against LTCG), 3K LTCL max (Dfor)
• owned by individual/partnership, original owners, not issued for stock or services
• US corp, passive income <50%, only 1^st million (par+APIC) counts

Casualty and Theft Losses

Sudden, unexpected, or unusual loss (act of god)

Amount of Loss

1. Business/Income Property (Sec. 162 and 212)
   • Gross Loss – Reimbursement (expected) = Net Loss
   • *gross loss = loss in FMV
2. Personal Use
   • Gross Loss – Reimbursement – $100 per casualty – 10% AGI (per year) = Net Loss (ID)
   • *net business losses 1^st, then personal

Netting Casualty/Theft Gains or Losses

• a. Sec 162/212 – net 1231 gains and losses
• b. Personal use – if all gains or all losses – no netting
  • i. All gains – capital gains
  • ii. All losses – ordinary losses
• Personal Use – if all not gains, or all not losses
  • i. Net losses – ordinary loss (reduce by 10% of AGI) – only if personal use
  • ii. Net gain – all casualties – capital gains and losses (no 10%)
• *for netting personal use, losses reduced by reimbursement, $100 per casualty, but not 10% of AGI until end

Losses Deductible When

• a. Thefts – year of discovery
• b. Casualties – year of event

Insurance Reimbursements

• a. Losses reduced by actual or expected reimbursement
• b. If reimbursement differs from expected
  • a. Add to income (tax benefit rule)
  • b. Reduce reimbursements – report additional casualty in subsequent year after subtract 10% of AGI (no $100 floor)
• c. Presidential Disaster – claim casualty year prior to loss

Bad Debt

1. Bona fide debt, basis in debt, worthless
2. Bona Fide Debt – collection effort, signed doc, reasonable
3. Basis – cash basis TP (usually have) accrual basis (don’t usually have)
4. Worthlessness – bankrupt, death, refusal, no funds
5. Business bad Debt – uncollectable a/r, loans, goods not rec
6. Non Business Bad Debt – loans to business/person, loss of deposit