R3-M3

Question 1

Capital assets:

Answer 1

Real and personal property

• NOT used in business
• Investment assets that are not inventory (land/securities)

Question 2

Capital gains/loss treatment for individuals:

Answer 2

Net capital loss deduction on $3,000 max
-excess carried forward
Capital gains are FULLY taxable

Question 3

Calculating net loss/gain:

Answer 3

• Net short term G/L
• Net ST losses against highest tax rate first
• Net losses against remaining gains
• Only 3,000 of remaining loss is deductible against ORDINARY income

Question 4

NON capital assets:

Answer 4

• Property used in business(equipment, inventory, accounts receivable)
• Copyrights held by OG artist (created NOT bought)
• Treasury stock

Question 5

Installment sale calculation:

Answer 5

• Gross profit= Sales price- COGS
• GP %= GP/Sales price
• GP recognized in yr of sale=Cash collections received in yr*GP %
• Adj basis is increased by amt of selling costs

Question 6

Worthless stock:

Answer 6

• Treated as a capital loss
• Basis=purchase price/cost (option exercise price is irrelevant)
• ST or LT based on last day of taxable yr in which they became worthless

Question 7

Section 1231 assets:

Answer 7

LT, business, depreciable or real property

• First: Net G & L
• If G>L, net amt= LT capital gain
• If L>G net amt=ordinary loss

Question 8

Section 1231 assets:

Answer 8

LT, business, depreciable/tangible or real property

• First: Net G & L
• If G>L, net amt= LT capital gain
• If L>G net amt=ordinary loss

Question 9

Tax treatment for section 1245 assets:

Answer 9

-Lesser of: Amt of accumulated depreciation OR Gain =
(Recapture)–>ordinary income
-Excess gain is section 1231 gain

Question 10

Installment sales rules:

Answer 10

• Recognize revenue when cash is received (even if accrual basis)
• Gain from sale of depreciable property (NOT land) to a RELATED PARTY is ineligible for installment reporting

Question 11

When depreciation recapture is lower than total accumulated depreciation:

Answer 11

• No 1231 Gain

- Entire gain is from recapture

Question 12

Gain for building:

Answer 12

Individuals:
-No depreciation recapture, entire gain is 1231
Corporations:
-Section 1231 gain= Total gain from selling property in excess of cost

Question 13

Types of section 1231 assets:

Answer 13

1245 assets: Machinery and equipment

1250 assets: Real property

Pure 1231: Land

Question 14

179 expense:

Answer 14

• $510,000 max exp is lowered $ for $ over 2,030,000 amount
• New or used machinery or equipment
• N/A to buildings or land
• May not create a loss

Question 15

Cost depletion:

Answer 15

Basis of property(cost) / # of remaining recoverable units

• multiplied by # of units sold
• computation of rate is redone every year

Question 16

Percentage depletion:

Answer 16

Multiply % by gross income from property for year

• deduction limited to 50% of taxable income in yr (not carried forward)
• Greater deduction amt per year
• only used for tax purposes