Question

Mike sold equipment he is no longer using in his business at a loss of $4,000, and he sold investments at a loss of $8,000. Mike had no other sales of property in the current year. What are the tax implications of these losses to Mike?

A) Deduct $3,000 of the loss on equipment and $3,000 of the loss on investment in the current year. The remaining losses are carried forward.
B) Deduct the $4,000 loss on equipment and $3,000 of the loss on investment in the current year. The remaining investment loss is carried forward.
C) Deduct the $4,000 loss on equipment but not the $8,000 investment loss as this is considered a personal asset.
D) Deduct both losses in their entirety in the current year.

Answer 1

Mike can deduct the $4,000 business loss on equipment fully and $3,000 of his investment loss in the current tax year. The remaining $5,000 investment loss can be carried forward to future years. Thus, option B correctly describes the tax implications for Mike's situation.

Step-by-step explanation:

The tax implications of Mike's losses on equipment and investments differ. The Internal Revenue Code allows for certain business losses to be deducted in the year they are incurred. Given this situation:

• The $4,000 loss on equipment, if it was used in his business, is generally fully deductible against Mike's business income in the current tax year.
• Investment losses have different rules. Mike can only deduct up to $3,000 of net capital losses against ordinary income in the current year. This means that he can deduct $3,000 of the $8,000 investment loss, and the remaining $5,000 can be carried forward to offset future capital gains or up to $3,000 of ordinary income in subsequent years.

Therefore, the correct tax implication for Mike would be option B: Deduct the $4,000 loss on equipment and $3,000 of the loss on investment in the current year. The remaining investment loss is carried forward.