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Maximizing Bad Asset Losses

November 2015
Accounting Today

In an article published on Nov. 3, 2015, Brett Beveridge discusses determining the desirable treatment for maximizing bad asset losses. Although the Tax Code is not overly complex in its approach to deductible losses, careful planning is a must to maximize the effect on a business return. The rule of thumb in structuring transactions that might lead to a loss is that ordinary losses are good, while capital losses are not so good. In the case of bad assets, there are things that can be done to obtain an ordinary loss, according to Beveridge. Beveridge cited the Madoff case and Santa Fe Pacific Gold as two examples where the desirable ordinary loss treatment was not a given. “In general, a loss of an investment from an open market purchase due to fraudulent activity is treated as a capital loss,” he explained. “However, a theft loss is not a capital loss. The IRS after public pressure, issued a favorable revenue ruling holding that a loss from a Ponzi scheme similar to Madoff’s was a theft loss.” The article goes on to discuss retiring an asset. Beveridge describes, “Unlike abandonment or worthlessness loss in which the loss is equal to the remaining tax basis, in a permanent retirement the amount of the loss is equal to the asset’s adjusted basis less any salvage value or fair market value.” You may access the full article here.