REG 25 - Property Transactions 2 - Cost Recovery Flashcards
On August 22, 2014 Martha purchases a computer to use in her childcare business. She sells the computer on December 28, 2014 for $2,000 when the machine has an adjusted tax basis of $1,700. What is the amount and character of the gain on the sale? A. $300 short-term capital gain. B. $300 long-term capital gain. C. $300 ordinary income. D. $300 Section 1231 gain.
C. Tangible assets that are used in a trade or business and owned for one year or less are ordinary assets. Since the computer was owned for slightly more than four months, the gain is classified as ordinary income.
Lobster, Inc. incurs the following losses on disposition of business assets during the year:
- Loss on the abandonment of office equipment $25,000
- Loss on the sale of a building (straight-line depreciation taken in prior years of $200,000) 250,000
- Loss on the sale of delivery trucks 15,000
What is the amount and character of the losses to be reported on Lobster’s tax return?
A. $40,000 Section 1231 loss only.
B. $40,000 Section 1231 loss, $50,000 long-term capital loss.
C. $40,000 Section 1231 loss, $250,000 long-term capital loss.
D. $290,000 Section 1231 loss.
D. All of the assets sold are assets that have been used in a business and are therefore Section 1231 losses. Thus, all of the losses are Section 1231 losses and total $290,000.
Jared purchases an apartment building on January 1, 2005 for $500,000. The building is depreciated using Modified Accelerated Cost-Recovery System (MACRS) straight-line depreciation. The apartment building is sold on December 31, 2015 for $620,000, when its adjusted tax basis is $320,000 (assume that $180,000 of depreciation has been claimed). How much gain from the sale of the building is subject to the 25% rate? A. $0 B. $180,000 C. $300,000 D. $320,000
B. Total gain on the sale is $300,000 ($620,000 - $320,000). Gain on the sale of realty is taxed at a 25% rate to the extent of the straight-line depreciation claimed on the asset. (Note that there is no Section 1250 recapture since straight-line depreciation was used for the asset.) The straight-line depreciation was $180,000 so the first $180,000 of gain is taxed at 25%. The remaining gain of $120,000 is taxed as Section 1231 gain.
T/F: Section 1250 recapture results in the recharacterization of gain recognized on the sale of depreciable personalty used in the trade or business.
False.
“Section 1245 recapture” recharacterizes gains on personalty as ordinary income to the extent of accumulated depreciation.
“Section 1250 recapture” is recapture of accumulated accelerated depreciation on buildings in excess of straight-line depreciation as ordinary income.
T/F: A factory building is subject to recapture under Section 1245.
False.
“Section 1245 recapture” recharacterizes gains on personalty as ordinary income to the extent of accumulated depreciation.
“Section 1250 recapture” is recapture of accumulated accelerated depreciation on buildings in excess of straight-line depreciation as ordinary income.
A taxpayer purchased five acres of land for $200,000 and placed in service other tangible business assets that cost $450,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $500,000, what maximum amount of cost recovery can the taxpayer claim this year? A. $650,000 B. $500,000 C. $450,000 D. $200,000
C. Land is not depreciable. Section 179 can be elected to expense the $450,000 of business assets since it does not exceed the maximum Section 179 limit of $500,000 as given in the problem.
On January 1, Fast, Inc. entered into a covenant not to compete with Swift, Inc. for a period of five years, with an option by Swift to extend it to seven years. What is the amortization period of the covenant for tax purposes? A. 5 years. B. 7 years. C. 15 years. D. 17 years.
C. The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.
ACE Landscaping purchased equipment for $3,000 in the current year that it plans to use 100% for business purposes. The equipment qualifies as 5-year property. The deprecation percentages provided in the MACRS tables are as follows:
Year 1 20.00% Year 2 32.00% Year 3 19.20% Year 4 11.52% Year 5 11.52% Year 6 5.76%
On August 20 of Year 3 ACE sells the equipment for $1,800. The depreciation allowed for the equipment for Year 3 is (rounded to the nearest dollar):
A. $ 0
B. $173
C. $288
D. $575
C. The MACRS rules for personalty use the half-year convention which provides a deduction for one-half of the regular deprecation for the asset in the year it is sold. This, the depreciation for Year 3 is $3,000 x 19.2% x ½, or $288.
On August 1, 2015, Graham purchases and places into service an office building costing $264,000, including $30,000 for the land. What was Graham's MACRS deduction for the office building in 2015? A. $9,600 B. $6,000 C. $3,600 D. $2,250
D. Under MACRS, the office building is considered non-residential real property. Land cannot be depreciated. Its class life is 39 years. MACRS requires that the straight-line method be used to compute the depreciation of 39-year class life property. Therefore, the office building would be depreciated at a rate of $6,000 per year ([$264,000 building cost, less $30,000 cost of land]/39 years). However, the mid-month convention applies to 39-year class life property. This convention requires that, regardless of when realty is placed into service, it is considered to be placed into service at mid-month. Therefore, for August 2015 (the first month of service), Graham could deduct $250 (= $6,000/12 months x one-half of a month). For the period of September 2015 to December 2015 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 x 4/12 months). Hence, Graham’s MACRS deduction for the office building in 2015 would be $2,250, the sum of the two periods.
Under modified accelerated cost recovery system (MACRS) depreciation for property placed in service after 1986,
A. Used tangible depreciable property is excluded from the computation.
B. Salvage value is ignored for the purposes of computing the MACRS deduction.
C. No type of straight-line depreciation is allowable.
D. The recovery period for depreciable realty is 27.5 years.
B. Under MACRS, the property’s depreciable basis as determined by Code Section 162 is used to compute the depreciation deductions, except that salvage values are considered to be zero. Hence, the salvage value is ignored for computing the MACRS depreciation deduction and, therefore, this response is correct.
Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:
Goodwill $50,000
Covenant not to compete 13,000
For tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery periods?
A. $63,000
B. $50,000
C. $13,000
D. $0
A. Goodwill is always amortizable. Covenants not to compete qualify if acquired in connection with the acquisition of a trade or business. Therefore, $63,000 can be amortized.
T/F: For a taxpayer to use regular MACRS depreciation for a computer, the business use percentage for the asset must be at least 50%.
False.
the business use of the computer must exceed 50% of total use.
T/F: If a calendar year business purchases $30,000 of office furniture in October, and has no other purchases during the tax year, then the convention that is used to depreciate the furniture is the half-year convention.
False.
Mid-year convention is used when there are purchases throughout the year.
If more than 40% of personalty acquired during the year is purchased in the last quarter of the year, then mid-quarter convention is used.
