more than one trade or business, and furnishing evidence of 3.-Fall back upon the provisions of the fifth paragraph The individual will be within his rights if he follows the suggestion just made. He knows whether he is engaged in one business, or more than one business, and it is his right to make his claim for deduction on account of losses accordingly. By doing so he risks no penalty but may save hundreds (or possibly thousands) of dollars in taxes that he does not legitimately owe and should not be assessed. 95. HOW TO ASCERTAIN LOSS. In the event a loss is deductible it must be ascertained according to one of two general methods. 1. When sustained from the sale or other disposition of property, real, personal or mixed, acquired before March 1, 1913, the amount of loss must be determined upon the basis of the fair market price or value of the property as of March 1, 1913. 2. When sustained from the sale or other disposition of property acquired on or subsequent to March 1, 1913, the amount of loss must be determined upon the basis of the cost of the property. In this connection it is suggested that the reader note the explanation given with respect to method of ascertaining gain from the sale or disposition of property, real or personal. 96.-VALUE AS OF MARCH 1, 1913. The fair market price or value of real property as of March 1, 1913 can be ascertained by considering any bona fide offer made immediately prior to that date, or the selling price at about that time of similar property, or in some other way suggested in the paragraph on "Gain from Real Property." Sometimes the individual must fall back upon such bases as local assessment and court appraisement for a working foundation. The method must be varied to fit each individual case; it is impossible to lay down a general rule. And in some respects so it is in regard to the fair market price or value of personal property, particularly securities, as of March 1, 1913. There is, however, to be considered the fact that in the case of many such securities as stocks and bonds there is available record of the price at which they were selling on the market on March 1, 1913; hence in any such case the determination of a basis of loss computation is comparatively simple. 97.-COST ON OR AFTER MARCH 1, 1913. The cost of property acquired on or after March 1, 1913 (as) a basis of ascertaining loss or gain) is held by the Treasury Department to be the actual price paid for it, plus any expense incident to purchase and sale, and the cost of improvement, if any. Special assessments, which have added to the value of the property and have not been allowed as deductions on account of taxes, also become a part of the cost of the property, in the case of real estate. Such assessments are those for street and sidewalk improvement, local sewerage, and the construction of irrigation and reclamation works. 98.—BAD DEBTS. Deduction for bad debts is allowed only when the debt due the taxpayer has been actually ascertained to be worthless and has been charged off within the year for which the return is made. It is not sufficient that the taxpayer merely regard a debt as worthless. He must have made some effort to collect and must have then charged off the amount due him as an absolute loss in his own system of accounting. The insistence of the ruling is that there be no guessing as to the worthlessness of the debt. The fact of loss must be established to make the amount due an allowable charge against gross income. 99.-DEPRECIATION DUE TO EXHAUSTION, WEAR AND TEAR. The Federal Income Tax law provides for the deduction of a "reasonable allowance" for the exhaustion, wear and tear of physical property used in the business of the taxpayer. Such "reasonable allowance" may be claimed in a return of income, provided the fact that it is "reasonable," within the meaning of the Treasury Department regulations, can be established. However, for the reason that the subject is one of such great importance and for the further reason that both individuals and corporations must follow the same rules, it has been deemed advisable to dis cuss the question fully with detailed illustrations, in a separate chapter under the heading, "Depreciation of Physical Property." The reader is, therefore, referred to the special chapter on the subject. 100.-DEPLETION OF OIL, GAS AND ORE DEPOSITS. Also, the taxpayer is allowed to deduct a "reasonable allowance' for reduction in flow of oil and gas from wells, and for depletion of ore deposits in mines. But, as in the case of depreciation of physical property, this subject is one with which both individuals and corporations are concerned and can be done justice only in a separate chapter where it can be gone into in full detail. And so the reader is referred to such special chapter under the heading, "Depletion of Natural Deposits." 101.-GIFTS TO CHARITIES, ETC. An individual is also allowed as a deduction contributions or gifts made during the year covered by his return to charitable and other organizations of certain classes, but the deduction on this account can not be excess of 15 per cent of what his net income would be if this particular deduction were not allowed. In order for such a contribution or gift to be allowable as a deduction, the organization to which it is made must have been formed and be operated exclusively for religious, charitable, scientific, or educational purposes, or it may be a society for the prevention of cruelty to children or animals, provided no part of its net income inures to the benefit of any private individual. CHAPTER VII THE INCOME TAX CREDITS IN COMPUTATION OF INDIVIDUAL TAX. (The credits referred to in this chapter are those allowed citizens or residents of the United States.) 102.-CREDITS ALLOWED. Even after the individual has stated in full his gross income (excluding, of course, income exempt from tax) and has claimed the deduction to which he is entitled, there are certain credits he is allowed in the computation to determine his tax liability. 103.-CREDIT FOR EXCESS PROFITS TAX. The law provides that in assessing income tax the net income shown by a return shall be credited with the amount of any excess profits tax assessed for the same tax year. The amount of the excess profits tax is not allowed as a part of the general deduction for taxes in ascertaining net income (net income being gross income less deductions), but when net income has been ascertained it can be credited with the amount of excess profits tax assessed for the same tax year. Thus the amount of net income shown by the return less the excess profits tax, if any, assessed for the same tax year is the basis of income tax assessment. There are, however, certain other credits to be considered in the computation of normal tax liability. They are explained in the paragraphs immediately following. 104.-CREDIT FOR DIVIDENDS. The law provides that "for the purpose of the normal tax only, the income embraced in a personal return shall be credited with the amount received as dividends upon the stock or from the net earnings of any corporation, joint-stock company or association, or insurance company, which is taxable upon its net income." The amount received as dividends must be stated as a part of gross income but after net income has been ascertained by subtracting the total amount of deductions from gross income and after proper credit has been taken for excess profits tax, if any, the amount of dividends may be deducted in the computation of normal tax liability. However, as noted above, (in the case of a net income running into figures to make it subject to the additional tax) the determination of additional tax liability is entirely another consideration, and into such computation the amount of dividends must enter. On this latter point the law reads as follows: "For the purpose of the additional tax there shall be included as income the income derived from dividends on the capital stock or from the net earnings of any corporation, joint-stock company or association, or insurance company." 105.-SPECIFIC EXEMPTION. Credit is also allowed for what is known as the "specific exemption," with respect to the net income of every individual (citizen or resident). This specific exemption under the old law (Act of Sept. 8, 1916) is as follows: (a) A single person who is not the head of a family is al- (b) A single person who is the head of a family is allowed 106.-HEAD OF FAMILY. The Treasury Department has defined "the head of a family" as follows: "A person who actually supports and maintains one or more individuals who are closely connected with him by blood relationship, relationship by marriage or by adoption and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation." |