Bad debt amend back 7 years- all of them?

[sandigi]

Thank you to those who helped with my questions on Theft Loss and Bad Debt. And to Roland for pointing out the ability to amend back 7 years. I started a new thread here on Bad Debt.

Another question: If the house is principal residence or rental, does it make a difference? Is the rental treated as business bad debt, and if so, how is that reported?

TTB pg 8-5 gives good details on how to report a nonbusiness bad debt. Now if TP amends 2007 and reports $37,585 non-business bad debt; it is a ST capital loss and he only gets $3000 loss, and the balance will be carried forward. Does that mean then that I have to amend 2007-2012, all 6 years?

TP is new to me in 2013, so I don't know when his already huge capital gain carryover is coming from, but 2012 carryforward loss is $131,259 ST and $164,851 LT = $296,110 Total loss carryover.

[buzzardbreath]

Purist or Practical Response?

so I don't know when his already huge capital gain carryover is coming from, but 2012 carryforward loss is $131,259 ST and $164,851 LT = $296,110 Total loss carryover.

Great Santini I'm assuming you meant capital loss as net capital gains are not carried over.

The purist answer would be to amend 2007, and then use the new numbers to enter the calculation each year, as this would be the proper thing to do, showing the recalculation of Sch D concomitant with every amended return.

However, it is quite possible that a re-entry of these numbers for years 2008-2012 inclusive, may yield nothing other than a $3000 loss for every year anyway. And an amended return would yield no different results than have already been reported. A practical solution would be to amend only those years which would result in a different liability. Some of the years might be hard to find

You say you don't know where this huge carryforward is coming from, but I think you have to find out. If it occurred prior to 2007, there is every likelihood that the $3000 loss is an annual thing. If it occurred during the intervening years, I believe the year of this ghastly loss, at a minimum, would require a recalculation of Sch. D even if nothing happens to the bottom line.

So....from my vast and endless capacity for providing information which dwarfs the ability of other board members such as F E Duke, I have supplied you with not just one, but two answers. Take your pick...

[sandigi]

Yes I meant Loss

I agree. I'll have to look at all those years and they won't be hard to find. He had them the other day when he was here. Dumb me, I was just looking back 3 years and kept 2010 2011 and 2012. I sent him home with the rest of the tax returns and his big bundle of legal papers which I did not want to spend a day going through!

[Roland Slugg]

If the house is principal residence or rental, does it make a difference? Is the rental treated as business bad debt.

No. If this was a bad debt, it would be a "non-business" bad debt in either case.

Does that mean then that I have to amend 2007-2012, all 6 years?

Well, it means that the TAXPAYER needs to file amended returns for all those years if he wants to claim a deduction for this added loss.

This may or may not result in any actual current refunds for this taxpayer. It depends on the T/P's tax situation in each of those old years, and a big part of that will hinge on when that other huge loss was incurred. Also, since there is a cost to prepare and file amended returns, you should definitely discuss this with your client before preparing all those amended returns, so he can make an informed decision before giving you approval to prepare them. If the T/P happens to be elderly and doesn't believe there is any chance he will use up the existing $296k loss during his lifetime, he may well elect to forego adding the additional $37.5k loss to that pile.

Assuming the T/P was in the 25% tax bracket in each prior year, the potential refund would be $750 in each year ... up until the year that $296+k loss was incurred. (If his state also allows carrybacks, there would be additional amounts recoverable there, as well.) If he was in a lower tax bracket ... 15% or even 10% ... the potential refunds would be less, and if he was in one of the higher tax brackets, the refunds would be a little more. There is also the possibility that the T/P had a sizable capital GAIN in some prior year ... in 2007 or some later year but before the $296+k loss was incurred ... in which case the entire $37.5k loss may be usable in its entirety. If that happens to be the case, you will have a very happy new client.

You need more information: (1) See when that other big loss was incurred, and (2) look at his last several years' tax returns to see what the potential for recoveries really is.