Question

For each of the following situations, determine the deduction concepts involved, and explain how they form the basis for the tax treatment described:

a. Jamie sells her personal residence at a loss of $9,000. She is not allowed a deduction for the loss.

b. Jamie sells a building used in her business at a loss of $9,000. She is allowed to deduct a $9,000 loss on the sale of the building.

c. The Orlando Jams Partnership borrows $500,000 to use as working capital. During the current year, the partnership pays $45,000 in interest on the loan and repays $100,000 of the loan principal. Orlando can deduct both the $45,000 interest payment and the repayment of the loan principal.

Answer 1

Ans:

a) Jamie sells her personal residence at a loss of $9,000 but she is not allowed a deduction for the loss because as per business purpose concept the use of above property was personal only not for business, hence she is not allowed a deduction for the loss. In short use of property is decide the deduction allowed or not.  

b) Jamie sells a building used in her business at a loss of $9,000 but this time she is allowed to deduct a $9,000 loss on the sale of the building, because as per business purpose concept the use of above property for business not for personal, hence as per law she is allowed a deduction for the loss. In short use of property is decide the deduction allowed or not.

c) In the case of Orlando Jams Partnership borrowed a loan for business need and repayment of its Interest and Principle amount from the pocket of business. so it will book as expenses and every expenses booked in business is always deductible.