Module 3: Gains and Losses

Question 1

How are the dispositions of capital assets reported?

Answer 1

Form 8949 accumulates detailed info about each sale of various investments

Totals from 3949 are transferred to Schedule D (summarizes)

Question 2

What is the basis formula in determining the gain or loss?

Answer 2

Amount realized

= Gain/Loss

Question 3

What is included in the amount realized?

Answer 3

1. Cash rec’v (boot/loot)
2. Assumption of debt by buyer (if excess COD = boot/loot)
3. Property rec’v @ FMV; and
4. Services rec’v @ FMV
   5.

Question 4

What are the tax rates for Individual Long Term Capital Gains?

Answer 4

20% - Rich
15% - Average
0% - Poor

Question 5

What is the tax rate for Individual Short Term Capital Gains?

Answer 5

Tax rate = Ordinary income tax rate

Question 6

What is the tax rate for an Unrecaptured Section 1250 Gain?

Answer 6

25%

Question 7

What is the maximum net capital loss deduction for individuals?

Answer 7

$3,000 per year

Question 8

How is excess net capital loss treated?

Answer 8

Can only carry forward for unlimited time

Question 9

How is a personal bad debt loss treated?

Answer 9

As a short-term capital loss in year debt becomes worthless

Question 10

How are worthless stock and securities treated?

Answer 10

The cost (or other basis) is treated as a capital loss in the year they became totally worthless

Question 11

How are capital gains and loses netted?

Answer 11

1. Gains and losses are netted w/in each tax rate group = Net short-term and long-term gains or losses by rate group
2. Resulting short-term and long-term losses then offset short-term and long-term gains beginning w/highest tax rate group & continuing to lower rates

Question 12

How are net capital gains of a corporation treated?

Answer 12

They are added to ordinary income & taxed at the regular tax rate

No lower (special) tax rate

Question 13

How are net capital losses of a corporation treated?

Answer 13

May not be deducted from ordinary income

Only allowed to be used/offset capital gains

Question 14

How are excess corporate capital losses treated?

Answer 14

Carryback 3 years

Carryforward 5 years

Question 15

How are excess individual capital losses treated?

can’t undo past bad choices

Answer 15

Carryforward indefinitely

Question 16

How are excess net operating losses treated?

hindsight is 20/20

Answer 16

Carryback 2 years

Carryforward 20 years

Question 17

What type of assets do Section 1231, 1245 and 1250 assets relate to?

Answer 17

Business used assets (PP&E)

Question 18

What assets are Section 1231 assets composed principally of?

Answer 18

Depreciable personal and real property used in taxpayer’s trade/business and held over 12 months

Question 19

What is the benefit under Section 1231?

Answer 19

Allows long-term capital gains treatment (tax rates of 0, 15, and 20%) on net Section 1231 gains from sales, exchanges, or involuntary conversions of certain “noncapital” assets

Question 20

Does Section 1231 apply to C corporations?

Answer 20

No, all capital gains of a C corp are taxed at ordinary income tax rates

Question 21

How are net section 1231 losses treated?

Answer 21

As ordinary losses

Question 22

What are the advantages of an ordinary loss?

Answer 22

1. Capital losses in excess of capital gains cannot be deducted (except $3K allowance)
2. Section 1231 net loss is deducted in full w/out consideration of capital gains

Question 23

What do section 1245 assets consist of?

Answer 23

Depreciable personal properties used in a trade or business for > 12 months

Question 24

Upon the sale of a 1245 asset, what is recaptured as ordinary income?

Answer 24

The lesser of gain recognized or all A/D

Any remaining gain is a 1231 gain

Question 25

What do section 1250 assets consist of?

Answer 25

Real properties used in a trade/business > 12 months

Question 26

What is recaptured under section 1250 for corporations?

Answer 26

Only that portion of depreciation taken on real property that is in excess of straight line

Question 27

What is section 291?

Answer 27

The depreciation recapture that now primarily applies to corporations (rather than section 1250)

Question 28

For corporations under 291, what is the total amount of taxable recapture on real property as ordinary income?

Answer 28

It is equal to 20% of the lesser of: 1. The recognized gain or 2. The accumulated straight line depreciation

Question 29

For corporations, what is the only benefit of getting a capital gain?

Answer 29

It is used to offset capital losses

Question 30

What is the section 1250 recapture for individuals?

Answer 30

When individual sells 1250 asset at a gain and included the gain w/other 1231 gains, the amount equal to the lesser of: 1. recognized gain on the sale of 1250 asset, or 2. SL A/D on 1250 asset is taxed at max 25% Any gain in excess is taxed at preferential rates

Question 31

What is a simple rule of thumb for personal property recapture?

Answer 31

``` Loss = Treat as ordinary loss (no limitation) Ordinary income = Gain to extent of A/D Section 1231 (capital) gain = Gain for sale price in excess of original cost ```

Question 32

How should you treat a 1231 net loss?

Answer 32

Treat like extra depreciation you should have gotten

Question 33

Under the installment method, how is taxable income calculated?

Answer 33

By multiplying the annual cash collections by the gross profit percentage

Question 34

INSTALLMENT SALE | Gross profit

Answer 34

Sale - COGS

Question 35

INSTALLMENT SALE | Gross profit %

Answer 35

Gross profit / Sales price

Question 36

``` INSTALLMENT SALE Gain recognized (taxable income) ```

Answer 36

Cash collections (excluding interest) x Gross profit %

Question 37

Under statutory law, what assets are not considered capital assets?

Answer 37

- Property normally included in inventory or held for sale to customers - deprecial personal property and real estate used in trade/business (1231, 1245, 1250) - Accounts/notes rec'v arising from sales or services in taxpayer's business - Copyrights, literary, musical, or artistic compositions held by the original artist - Treasury stock

Question 38

What do capital assets under statutory law consist of?

Answer 38

Property held by the taxpayer for investment, such as: - Personal automobile - Furniture/fixtures in home - Stocks/securities of all types - Personal property of taxpayer NOT used for trade/business - Real property not used in trade/business - Interest in partnership - Goodwill of a corporation - Copyrights, literary, musical, artistic compositions purchased