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Application of nonbusiness bad debt provisions to an individual taxpayer

1. Paul operates a restaurant in Cleveland. He travels to Columbus to investigate acquiring a business. He incurs expenses as follows: $1,500 for travel, $2,000 for legal advice, and $3,500 for market analysis. Based on the different tax consequences listed below, describe the circumstances that were involved in Paulâ??s investigation of the business.

Paul deducts the $7,000 of expenses incurred.
Paul cannot deduct any of the $7,000 of expenses incurred.
Paul deducts $5,000 of the expenses incurred and amortizes the $2,000 balance over a period of 180 months.
2. Contrast the differing results obtained by using the IRS's approach and the court's approach to allocating property taxes and mortgage interest in a personal/rental situation. Which method would the taxpayer prefer and why.

3. John was the sole shareholder of Blonde, Inc. The corporation had 26 salaried employees, which included John. Several years ago Blonde began experiencing financial difficulties. As a result, john made several loans to the corporation in an attempt to continue business operations and pay employee salaries. The corporation eventually filed for bankruptcy under Chapter 7 of the bankruptcy code. Upon the final discharge of the corporation's debts, John's loans remain unpaid and were worthless. Identify the relevant tax issues for John with respect to his loans to Blonde, Inc.

4. Discuss the application of the nonbusiness bad debt provisions to an individual taxpayer.

Solution Preview

1. Paul deducts the $7,000 of expenses incurred. - this tells us that the business he traveled to see was also a restaurant, and because he is in the restaurant business, he can deduct the full amount paid for travel.

Paul cannot deduct any of the $7,000 of expenses incurred. - this tells us the business was not at restaurant, and that he did not acquire the business he traveled to investigate.

Paul deducts $5,000 of the expenses ...

Solution Summary

Paul operates a restaurant in Cleveland. He travels to Columbus to investigate acquiring a business. He incurs expenses as follows: $1,500 for travel, $2,000 for legal advice, and $3,500 for market analysis. Based on the different tax consequences listed below, describe the circumstances that were involved in Paulâ??s investigation of the business.

Paul deducts the $7,000 of expenses incurred.
Paul cannot deduct any of the $7,000 of expenses incurred.
Paul deducts $5,000 of the expenses incurred and amortizes the $2,000 balance over a period of 180 months.
2. Contrast the differing results obtained by using the IRS's approach and the court's approach to allocating property taxes and mortgage interest in a personal/rental situation. Which method would the taxpayer prefer and why.

3. John was the sole shareholder of Blonde, Inc. The corporation had 26 salaried employees, which included John. Several years ago Blonde began experiencing financial difficulties. As a result, john made several loans to the corporation in an attempt to continue business operations and pay employee salaries. The corporation eventually filed for bankruptcy under Chapter 7 of the bankruptcy code. Upon the final discharge of the corporation's debts, John's loans remain unpaid and were worthless. Identify the relevant tax issues for John with respect to his loans to Blonde, Inc.

4. Discuss the application of the nonbusiness bad debt provisions to an individual taxpayer.

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