Property transactions Flashcards
Capital assets include
A. A corporation’s accounts receivable from the sale of its inventory.
B. Seven-year MACRS property used in a corporation’s trade or business.
C. A manufacturing company’s investment in U.S. Treasury bonds.
D. A corporate real estate developer’s unimproved land that is to be subdivided to build homes, which will be sold to customers
C - For income-tax purposes, capital assets are any property held by a taxpayer, other than properties listed in Code Section 1221. Properties listed in Code Section 1221 include inventory, accounts receivable and depreciable properties or real estate used in trade or business
Which of the following is a capital asset?
A. Inventory held primarily for sale to customers.
B. Accounts receivable.
C. A computer system used by the taxpayer in a personal accounting business.
D. Land held as an investment.
D
The sale of which of the following types of business property should be reported as Section 1231 (Property Used in the Trade or Business and Involuntary Conversions) property? A. Inventory held for resale. B. Machinery held for six months. C. Cattle held for 6 months. D. Land held for 18 months
D - The land is business property owned for more than a year, so gain on its sale would generate Section 1231 gain.
Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Sec. 1244 stock loss made up three-fourths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Code Sec. 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Code Sec. 1244 loss that Summer can deduct for the current year? A. $35,000 ordinary loss. B. $35,000 capital loss. C. $50,000 ordinary loss. D. $50,000 capital loss
C - Even though the NOL includes $15,000 ($20,000 × 3/4) of Section 1244 loss that can be combined with the current Section 1244 loss of $50,000, the maximum deduction for a given tax year is $50,000 for a Section 1244 loss ($100,000 if married filing jointly)
Are capital gains and losses required to be classified as short term or long term?
Short term
Corporation carryback/forward for NOL
Carryback 3 years carry forward 5 years
The results of UNA Corporation’s first six years of operations are presented below.
Year Results of Operations. 1 Section 1231 losses of $50,000. 2 Section 1231 losses of $30,000. 3 Section 1231 gains of $75,000 4 Section 1231 losses of $20,000 5 Section 1231 losses of $30,000 6 Section 1231 gain of $80,000
UNA corporation’s year-six Section 1231 gain can best be characterized as
$55,000 ordinary income; $25,000 Sec. 1231 gain
The lookback provision states that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured. To the extent of these losses, the net Section 1231 gain is treated as ordinary income. The $75,000 gain in Year 3 was recaptured as ordinary income by $50,000 of the Year 1 loss and $25,000 of the Year 2 loss. Note that $5,000 of the Year 2 loss remains unrecaptured. The $80,000 gain is recaptured as ordinary income to the extent of the $5,000 remaining Year 2 loss, $20,000 Year 4 loss, and $30,000 Year 5 loss for a total of $55,000. The remaining $25,000 gain is treated as a Sec. 1231 gain
On August 22, 2015 Martha purchases a computer to use in her childcare business. She sells the computer on December 28, 2015 for $2,000 when the machine has an adjusted tax basis of $1,700. What is the amount and character of the gain on the sale? A. $300 short-term capital gain. B. $300 long-term capital gain. C. $300 ordinary income. D. $300 Section 1231 gain
C - Tangible assets that are used in a trade or business and owned for one year or less are ordinary assets. Since the computer was owned for slightly more than four months, the gain is classified as ordinary income
Lobster, Inc. incurs the following losses on disposition of business assets during the year:
Loss on the abandonment of office equipment $25,000
Loss on the sale of a building (straight-line depreciation taken in prior years of $200,000) 250,000
Loss on the sale of delivery trucks 15,000
What is the amount and character of the losses to be reported on Lobster’s tax return?
A. $40,000 Section 1231 loss only.
B. $40,000 Section 1231 loss, $50,000 long-term capital loss.
C. $40,000 Section 1231 loss, $250,000 long-term capital loss.
D. $290,000 Section 1231 loss.
D - All of the assets sold are assets that have been used in a business and are therefore Section 1231 losses. Thus, all of the losses are Section 1231 losses and total $290,000
Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245? A. $0 B. $ 40,000 C. $ 60,000 D. $100,000
C - The gain recognized from the sale is:
Amount realized $200,000
Adjusted basis ($160,000 - $60,000) 100,000
Recognized gain $100,000
Personalty is subject to the Section 1245 depreciation recapture rules which indicate that gain will be taxed as ordinary income up to the amount of depreciation claimed on the property. Since there was $60,000 of depreciation on the equipment, $60,000 of the gain is taxed as ordinary income and the remaining $40,000 is taxed as Section 1231 gain
Classified as ordinary income/loss when asset is sold
- Inventory and accounts/notes receivables
- Depreciable property used in a trade/business and realty that have been owned for a year or less
On August 1, 2015, Graham purchases and places into service an office building costing $264,000, including $30,000 for the land. What was Graham’s MACRS deduction for the office building in 2015?
$2,250
Under MACRS, the office building is considered non-residential real property. Land cannot be depreciated. Its class life is 39 years. MACRS requires that the straight-line method be used to compute the depreciation of 39-year class life property. Therefore, the office building would be depreciated at a rate of $6,000 per year ([$264,000 building cost, less $30,000 cost of land]/39 years). However, the mid-month convention applies to 39-year class life property. This convention requires that, regardless of when realty is placed into service, it is considered to be placed into service at mid-month. Therefore, for August 2015 (the first month of service), Graham could deduct $250 (= $6,000/12 months x one-half of a month). For the period of September 2015 to December 2015 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 x 4/12 months). Hence, Graham’s MACRS deduction for the office building in 2015 would be $2,250, the sum of the two periods.
Browne, a self-employed taxpayer, has 2015 business net income of $15,000 prior to any expense deduction for equipment purchases. In 2015, Browne purchases and places into service, for business use, office machinery costing $20,000. This is Browne’s only 2015 capital expenditure.
Browne’s business establishment is not in an economically distressed area. Browne makes a proper and timely expense election to deduct the maximum amount (assumed to be $25,000 ignoring bonus depreciation). Browne is not a member of any pass-through entity.
What is Browne's deduction under the election? A. $4,000 B. $10,000 C. $15,000 D. $20,000
C - Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business. The statutory amount is $25,000 for 2015. The Code-Section 179 deduction is limited to the amount of taxable income originating from the trade or business in which the property is used and is reduced dollar-for-dollar when the taxpayer places qualifying tangible personal property in service that exceeds $200,000. Since Browne purchases the equipment for use in business, the property qualifies as Code-Section 1245 property and, therefore, is eligible for the Code-Section 179 deduction. Browne’s income could limit the amount of the deduction, because the statutory amount, $25,000, is more than Browne’s business income of $15,000. Hence, Browne may elect under Code Section 179 to deduct $15,000. The remaining $5,000 of the cost of $20,000 can be carried over to future years
Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:
Personal use. 25%
Investment use. 30%
Business use. 45%
Will Kaitlin's use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset's basis qualifies to be depreciated? A. Straight-line, 45%. B. Accelerated, 45%. C. Straight-line, 75%. D. Accelerated, 75%
C - A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin’s business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset’s basis qualifies to be depreciated
ACE Landscaping purchased equipment for $3,000 in the current year that it plans to use 100% for business purposes. The equipment qualifies as 5-year property. The deprecation percentages provided in the MACRS tables are as follows:
Year 1 20.00% Year 2 32.00% Year 3 19.20% Year 4 11.52% Year 5 11.52% Year 6 5.76%
On August 20 of Year 3 ACE sells the equipment for $1,800. The depreciation allowed for the equipment for Year 3 is (rounded to the nearest dollar):
$288 - the MACRS rules for personalty use the half-year convention which provides a deduction for one-half of the regular deprecation for the asset in the year it is sold. This, the depreciation for Year 3 is $3,000 x 19.2% x ½, or $288
