REG 2

Question 1

What are the 3 classifications of assets?

Answer 1

Ordinary - A/R and N/R, inventory, trade or business assets owned for a year or less; Section 1231 - Trade or business assets owned for more than a year; Capital - All other assets (i.e. assets used for personal activities, investments, goodwill, patents).

Question 2

How to calculate realized gain or loss on sold or disposed-of assets:

Answer 2

Amount realized - adjusted basis = realized gain/loss.

Question 3

What is amount realized in realized gain or loss calculation?

Answer 3

Amount realized includes cash received, FMV of any property received, and liabilities assumed by the buyer, all less selling expenses.

Question 4

What is adjusted basis in realized gain or loss calculation?

Answer 4

Adjusted basis equals the cost or acquisition basis of property. Cost = any liabilities or expenses associated with the acquisition - depreciation, amortization, or depletion + capital improvements.

Question 5

What is “basis”?

Answer 5

Basis is usually determined by the asset’s cost, which includes all the expenditures required to “place an asset in service”, including transportation, installation, testing, and taxes.

Question 6

Rule for recognizing gains or losses:

Answer 6

Always assume realized gains or losses will be recognized unless you are aware of a tax rule that excludes or defers the gain or loss.

Question 7

In general, are losses from the sale or disposition of assets for personal use recognized?

Answer 7

No.

Question 8

Basis rules for gifts:

Answer 8

If property is gifted to a taxpayer, the donee will have a gain or loss basis. If the gift is sold for more than the gain basis, a gain is recognized. If the gift is sold for less than the gain basis, a loss is recognized. If sold in between the two bases, no gain or loss is recognized.

Question 9

What is gain basis?

Answer 9

Adjusted basis of the donor. Depreciable basis = gain basis.

Question 10

What is loss basis?

Answer 10

Lower of a. FMV at date of gift, or b. adjusted basis of donor.

Question 11

How to calculate adjustment for appreciation of gifts:

Answer 11

[Unrealized appreciation / (FMV at date of gift - annual exclusion)] X gift tax paid = adjustment

Question 12

Inheritance basis rules:

Answer 12

Basis to the beneficiary is the FMV of the asset on the date of the taxpayer’s death, or the alternate valuation date (six months after date of death) if that is elected by the estate’s executor.

Question 13

Holding period for gifts…

Answer 13

Carries over if the property is sold for a gain, does not carry over if sold for a loss.

Question 14

Holding period for inheritances…

Answer 14

Is always long-term.

Question 15

If the combination of net short-term and net long-term gains and losses is negative, how much of this capital loss can an individual deduct per year?

Answer 15

$3,000.

Question 16

For corporations, how are net capital losses treated?

Answer 16

NCL can only offset capital gain net income; unused NCL is short-term, and can be carried back 3 years and forward 5 years.

Question 17

Is there a preferential rate for long term capital gains?

Answer 17

For individuals, YES. For corporations, NO.

Question 18

Treatment of personal casualty and theft gains and losses:

Answer 18

If gains exceed losses (after the $100 floor for each loss), then all gains and losses are treated as capital gains and losses (ST or LT depending on holding period). If losses (after the $100 floor for each loss) exceed gains, the losses 1. offset gains, and 2. are an ordinary deduction from AGI to the extent in excess of 10% of AGI.

Question 19

Section 1244 loss rules:

Answer 19

First $50,000 of losses (first $100,000 if MFJ) from sale of section 1244 stock will be treated as ordinary loss. The individual seller must be original holder of the stock. Total capitalization of the corporation cannot exceed $1 million at time stock is issued.

Question 20

Qualifying Small Business Stock Rules:

Answer 20

QSBS is stock of a small business corporation (less than $50 million) held for more than 5 years. Max gain eligible for exclusion (100%) is greater of a. 10 times the taxpayer’s basis in the stock, or b. $10 million. Exclusion percentages: 50% purchased before Feb. 17, 2009, 75% purchased between Feb. 18, 2009 and Sept. 28, 2010, inclusive.