REG: Section 1231 Assets Flashcards
Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?
$0
$ 40,000
$ 60,000
$100,000
$60,000
The gain recognized from the sale is:
Amount realized $200,000
Adjusted basis ($160,000 - $60,000) 100,000
Recognized gain $100,000
Personalty is subject to the Section 1245 depreciation recapture rules which indicate that gain will be taxed as ordinary income up to the amount of depreciation claimed on the property. Since there was $60,000 of depreciation on the equipment, $60,000 of the gain is taxed as ordinary income and the remaining $40,000 is taxed as Section 1231 gain.
On January 2, 2014, Bates Corp. purchases and places into service seven-year MACRS tangible property costing $100,000. On December 31, 2018, Bates sells the property for $102,000, after having taken $47,525 in MACRS depreciation deductions.
What amount of the gain should Bates recapture as ordinary income?
$0
$2,000
$47,525
$49,525
$47,525
The property sold by Bates Corp. is Section 1245 property and, as such, is subject to 1245 recapture. Section 1245 property includes all depreciable personal property (for example, equipment and machinery). Under Section 1245 recapture, gains are treated as ordinary income to the extent of depreciation or amortization taken on the property. The basis of Bates Corp.’s property at the time of the sale is $52,475 − $100,000 purchase price, less $47,525 in depreciation. Hence, the corporation had a gain of $49,525. However, owing to Section 1245 recapture, the amount of depreciation allowed, $47,525, will be considered ordinary income and only $2,000 will be considered a gain.
A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization deduction for the current year?
$3,000
$6,000
$8,000
$16,000
$8,000
Customer lists, trade names, and goodwill are intangible assets that are amortized over 180 months (15 yrs). For the current year the assets are amortized for six months since the business began July 1. ($240,000/180 months × 6 months = $8,000).
On August 1, 2018, 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 2018?
$9,600
$6,000
$3,600
$2,250
$2,250
Under MACRS, the office building is considered nonresidential real property. Land cannot be depreciated. Its class life is 39 years. MACRS requires that the straight-ine 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 2018 (the first month of service), Graham could deduct $250 (= $6,000/12 months × one-half of a month). For the period of September 2018 to December 2018 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 × 4/12 months). Hence, Graham’s MACRS deduction for the office building in 2018 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:
Used tangible depreciable property is excluded from the computation.
Salvage value is ignored for the purposes of computing the MACRS deduction.
No type of straight-line depreciation is allowable.
The recovery period for depreciable realty is 27.5 years.
Salvage value is ignored for the purposes of computing the MACRS deduction.
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.
