joshuabarksatlcs
Level 10
‎10-19-2021 01:23 PM

RE: The repayment is deducted, in general, on the same form or schedule on which it was previously included. If it had been included as self-employment income on Schedule C, Profit or Loss from Business, it is deducted on Schedule C. If it had been included as capital gain on Schedule D, Capital Gains and Losses, it is deducted on Schedule D. If it was reported as wages, taxable unemployment compensation, or other non-business ordinary income, it is deducted on Schedule A, Itemized Deductions.

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Here is the text for Section 1341(a)  - didn't edit out (a) this time, hahahaha...

(a)General rule

If—

(1) an item was included in gross income for a prior taxable year (or years) because it appeared that the taxpayer had an unrestricted right to such item;
 
(2) a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and
 
(3) the amount of such deduction exceeds $3,000, then the tax imposed by this chapter for the taxable year shall be the lesser of the following:
 
(4) the tax for the taxable year computed with such deduction; or
 
(5)an amount equal to—
 
(A) the tax for the taxable year computed without such deduction, minus
 
(B) the decrease in tax under this chapter (or the corresponding provisions of prior revenue laws) for the prior taxable year (or years) which would result solely from the exclusion of such item (or portion thereof) from gross income for such prior taxable year (or years).
 
For purposes of paragraph (5)(B), the corresponding provisions of the Internal Revenue Code of 1939 shall be chapter 1 of such code (other than subchapter E, relating to self-employment income) and subchapter E of chapter 2 of such code.

 

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@qbteachmt , your quoted text above would be the deduction (yes, on Schedule C) under Section 1341 (a)(2) (deduction amount = the claim of right repayment), which is basically the amount for Section 1341(a)(4).

I was computing the credit under Section 1341(a)(5).  TP may claim a deduction under (a)(2) or a credit under (a)(5).  If you look further down from the instructions that you quoted, you should also see something about a credit.

The problem I have is that for the purpose of the credit, (a)(5) refers to something that I couldn't make sense of.  For the purpose of the credit, it's NOT clear to me whether the difference under (5) - that is between (5)(A) and 5(B) would include SE Tax.

 The tax benefit for the credit is much higher than the deduction.  The deduction would make the taxable income a low amount and the tax benefit would thus be generated at the lower tax rates.

IF SE tax was relevant, the deduction would make the SE income for 2021 negative.  thus NOT the full amount would generate tax benefit from the SE tax difference (for the credit).

Tax credit - based on Sec 1341(a)(5) - is computed by the difference of With and Without the excess (claimed) amount  for each year.  The difference for each year would be computed at TP's top rate.

Section 1341(a) allows either a deduction OR a credit.  @qbteachmt  thanks for your info, but you addressed just the deduction, and NOT the credit (with the higher tax benefit).

The addition tax benefit from claiming the credit (even without the SE tax) would be at least 15% of the $300K repayment.  (federal and state)


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