Chapter 12 Flashcards
Ordinary Income Assets
Generate gains that will be taxed at ordinary income tax rates. Out of the items that are not defined as capital assets under IRC Section 1221, the first three items (accounts receivable, copyrights, and inventory) are all ordinary income assets.
Section 1231 Assets
Depreciable property or real property used in a trade of business is a Section 1231 Asset
T/F In order to be a section 1231 asset, the owner of the asset must have long-term holding period for the asset (the owner must have held the asset for more than a year?
True
Section 1231 Includes:
Depreciable or real property used in a trade or business, b)timer coal, or domestic iron ore, c. livestock held for draft breeding , dairy, or sporting purposes, d. unharvested crops on land used in business, and e) certain purchased intangible assets such as patents and goodwill that are eligible for amortization.
1245 recapture
Applies to personalty items that are used in a trade or business (patents, copyrights, pc, desks, machines). When the 1245 items are recapture, it is subject to the depreciation taken. Any depreciating taken is coming back as ordinary rates. The rest of the money received will be treated at capital rates
1250 recapture
Real estate. OI= any accelerated depreciation greater than SL. 25% all of the SL taken and all remaining gain will be 1231 capital rates.
T/F 1231 assets are potentially subject to 1245 or 1250 recapture
True
1231
Depreciable and real peroperty used in a trade or business and held for 1 year. Machine equipment, building, land.
What is the significant benefits of Section 1231 assets?
Once an asset is categorized as a Section 1231 asset gains generated from the sale of the asset are treated as capital gains for income tax purposes, and losses generated from the sale of the asset are treated as ordinary losses for income tax purposes.
What is the catch to 1231 assets
Depreciation Recapture. In order to be classified as Section 1231 asset, the asset must be “depreciable property or real property used in a trade or business.” The purpose of depreciation is to allow individuals and businesses who use property in productive use or n a trade or business to recoup their capital investment in the asset over the useful life of that asset. In an ideal world, the depreciation expense deduction that would be claimed by the taxpayer each year would be the actual decline in the value of the asset. Once the class life is determined, a statutorily defined deduction is taken for depreciation of the asset, regardless of the actual decline in value of the asset from year to year.
Recapture of Excess under Section 1250
The lesser of gain or the difference between depreciation taken and straight-line depreciation will be taxed as ordinary income.
T/F If the gain exceeds the amount in 1, the lesser of remaining gain or the straight-line depreciation taken on the property will be taxed at 25%.
True.
T/F Any gain in excess of 1 and 2 is taxed at capital gains tax rates ( 0, 15 and 20 percent)
True
Lookback Provision for Net& 1231 Gain
There would be an advantage to have all 1231 losses in a different year from gains. To control manipulation, net 1231 gains are treated as ordinary income to the extent that the taxpayer has nonrecaptured net and 1231 losses in the prior 5 year period.
Recapturing Depreciation on Personal Property
The sole purpose of depreciation recapture is to ensure that, when an asset is sold, the taxpayer receives his or her capital back tax-free - no more, and no less. Section 1245 states that when Section 1231 personal property is sold, depreciation is recaptured as ordinary income to the extent of the gain.
