Chapter 3

Question 1

Ordinary Assets

Answer 1

trade or business assets owned for less than a year

ie accounts/notes receivable, inventory

Question 2

Section 1231 assets

Answer 2

realty and depreciable property used in a trade or business owned for more than a year
-excluded from 1231 = inventory, property held for sale to customers, AR and NR arising in ordinary course of biz

Question 3

Capital assets

Answer 3

• all other assets than inventory, AR, NR used in a trade or business. (all assets other than ordinary or section 1231).
• the most common are those used in ones personal activities, investments, goodwill, patents

Question 4

What is the basis to a beneficiary of an inheritance?

Answer 4

the FMV at the date of death or the alternative valuation date (six months after the date of death) if that is elected by the estates executor

Question 5

what is the basis of a gift?

Answer 5

Gain basis - donors adj basis
Loss basis - lower of gain basis or FMV
Depr basis - gain basis

Question 6

How is money received as covenant not to compete recorded?

Answer 6

as ordinary income in the year received

Question 7

How long to carry back/forward capital loss?

Answer 7

Back three year (to farthest year first) and forward 5 years

Question 8

How much can individuals deduct as a capital loss?

Answer 8

Capital losses first offset capital gains, and then are allowed as a deduction of up to $3,000 against ordinary income per year. any remaining can be carried forward indefinitely

Question 9

Can losses on items held for personal use be deducted?

Answer 9

no

Question 10

What may one do if their stock becomes worthless?

Answer 10

Sec. 1244 permits a shareholder to deduct an ordinary loss of up to $50,000 per year ($100,000 if married filing jointly) if qualifying stock is sold, exchanged, or becomes worthless. The qualifying stock must have been issued in exchange for money or other property and must have been issued to the individual or partnership sustaining the loss. Ordinary loss treatment is not available if the shareholder sustaining the loss was not the original holder of the stock. As a result, an individual who acquires stock by purchase, gift, or inheritance from another shareholder is not entitled to ordinary loss treatment. Since Jackson inherited the Bean stock from his parents, Jackson does not qualify for ordinary loss treatment and his $25,000 loss will be recognized as a long-term capital loss.

Question 11

Section 1245 property

Answer 11

all depreciable property other than buildings

Question 12

Section 1250 property

Answer 12

buildings

Question 13

What depr is subject to recapture under section 1250?

Answer 13

All excess depr (depr in excess of straight-line). recaptures gain as ordinary income

Question 14

how much gain from the sale of a building is taxed at the 25% rate?

Answer 14

gain on the sale of realty is taxed at 25% rate to the extent of the straight-line depr claimed on the asset. The remaining gain will be taxed as section 1231 gain

Question 15

Listed property

Answer 15

property that is used for both personal and business use, ie. computer, car, (but NOT cell)
-biz use must exceed 50% of total use

Question 16

Start up costs - how much can one deduct

Answer 16

$5,000 - reduced by the amt of expenses incurred that exceed $50k. Expenses not deducted must be capitalized and amortized over 180 months

Question 17

Personalty

Answer 17

tangible property that is not realty

Question 18

Realty

Answer 18

land and any property attached to it.

Question 19

involuntary conversion

Answer 19

the result of a casualty (fire, storm, theft, condemnation)

Question 20

wash sale

Answer 20

a sale that results from the purchase of substantially identical stock within a 30 day window around the sale date. applies only to losses, not to gains

Question 21

How long is the statutory amortization period for a covenant not to compete

Answer 21

15 years