Reporting Gains and Losses

Question 1

Section 1202 qualified trade or business

Answer 1

These businesses do not qualify:

• Services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services
• One whose principal asset is the reputation or skill of one or more employees
• Banking, insurance, financing, leasing, investing, or similar business
• Farming (including timber)
• Oil or gas operations if percentage depletion can be claimed
• Operating a hotel, motel, restaurant, or similar business

Question 2

Passive Activity Loss

Answer 2

Passive activities occur when there is income from certain businesses where no material participation occurs. A passive loss is not deductible on an individual income tax return, but the loss may be used to offset income from other passive activities.

Question 3

Section 1202 exclusion

Answer 3

Certain eligible C corporations (must be a qualified trade or business) with gross assets under $50 million may qualify for special treatment under Section 1202 as qualified small business stock (QSB). A taxpayer selling QSB stock held for more than five years can exclude up to 100% of the eligible gain from income. The amount of gain eligible for the exclusion is limited to the greater of $10,000,000 or 10 times the adjusted basis.

Question 4

Section 1244 small business stock

Answer 4

Sale of stock of a small business corporation may qualify as a capital gain and loss may be an ordinary loss (loss limited to $50,000 each year or $100,000 if MFJ).

Stock must be issued for money or property (other than stock and securities).
Total money the corporation received for stock cannot exceed $1,000,000.
Must be the original owner of the stock to receive ordinary loss treatment.
Royalties, rents, dividends, interest, annuities, and stock sales must account for less than 50% of aggregate gross receipts in prior 5 years.

Question 5

Maximum long-term capital gain rates

Answer 5

28% – Gain on collectibles or qualified small business stock
25% – Un-recaptured Section 1250 gain
20% – All other capital gains

An adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, such capital gain is not taxed. Any adjusted net capital gain which would result in taxable income exceeding the 15-percent breakpoint but not exceeding the 20-percent breakpoint, such capital gain is taxed at 15-percent. The remaining adjusted net capital gain is taxed at 20-percent.

NOTE: Net short-term capital gains are taxed at the same rates as ordinary income.

Question 6

Capital Assets

Answer 6

Rather than defining capital assets, the law provides a list of properties that are not capital assets:

• Intangibles (self-created or with a transferred basis from creator).
• Supplies used in business.
• Accounts or notes receivable.
• Inventory.
• Depreciable property and real property used in business.