Asset Dispositions
What distinguishes a long-term capital gain from a short-term capital gain? How are these two types of capital gains taxed differently for individuals?
Long-term is held for more than 1 year and has favorable tax rates (0%, 15%, or 20%). Short-term is held 1 year or less and is taxed at ordinary income tax rates.
What term refers to the allocation of the cost of an intangible asset over its useful life?
Amortization
Peter Pan has tax before credits of $11K. He is eligible for a Child Tax Credit (a refundable credit) of $12K.
What is his Tax (or Refund) after Credits?
$1K Refund, since the tax credit is refundable.
Isaac and Marin got married on December 12, 2025. What possible filing status(es) could apply to them for tax purposes in 2025?
Married filing jointly or married filing separately. Isaac and Marin are legally married as of December 31, 2025, so they would file under one of the married filing statuses. Married filing jointly likely provides them the best tax outcome.
Under MACRS, what is the depreciation convention we use for real estate property?
Mid-month
Kyle bought a building many years ago for $750K. Over the years he has owned it, he has taken $500K of depreciation on the building. During the current year he sold the building in exchange for $1M cash and a piece of equipment worth $100K. What is the gain or loss realized on the sale of the building?
Cost basis: $750K
-Depreciation: -$500K
Adjusted Basis: $250K
Amount Realized: $1.1M (Cash + Equipment)
- Adjusted Basis: -$250K
Realized Gain: $850K
This year, Willow Co. placed in service the following assets: $100,000 Machinery (7-year property) placed in service March 3; $80,000 Computers (5-year property) placed in service September 20. Assuming Willow uses MACRS, what depreciation convention does Willow use for these assets?
Half-year convention. Both assets are personalty, and less than 40% was placed in service during the fourth quarter (in this case, none of the personalty Willow placed in service during the year was during the fourth quarter). So both the machinery and computers follow the default half-year convention for personalty.
Assuming the taxpayer is able to fully take advantage of either option, which provides more tax savings for an individual taxpayer: a $1K above-the-line deduction or a $1K tax credit? Explain why.
The tax credit provides more tax savings because it reduces tax by $1,000. The deduction would reduce tax by $1,000 * marginal tax rate.
David is not married and maintains a home for his two dependent children, ages 4 and 8, who live with him all year. What is David’s filing status?
Head of Household. David is unmarried and maintains a home for a dependent (in this case, two dependents).
Two years ago, Talia bought a computer for her personal use for $2,400. This year she decided to use the computer for her business instead of personal use. When she converted the computer to business use, it was worth $1000 (FMV). What is the original tax basis of the computer when she starts using it in her business?
$1000. The tax basis of property converted from personal to business use is the lesser of:
The Adjusted Basis of the property on date of conversion, or
The Fair Market Value (FMV) of the property on the date the asset is converted to business use
This year, Ram Corp sold a piece of land for $2 million that it had held for investment. The purchaser has agreed to pay Ram in installments: $1 million this year, $500k next year, and $500k the year after that. Ram's basis in the land was $1.2 million. Assuming Ram elects to use the installment method, how much gain or loss does Ram recognize related to the land sale this year?
Amount Realized: $2M
- Adjusted Basis: $1.2M
Realized Gain: $800K
Gross profit percentage = 800,000/2,000,000 = 40%
Gain recognized this year = $1M * 40% = $400,000
($200k of gain will be recognized in each of the two following years, so that in total the realized gain of $800k is fully recognized over the three years of the installment payments.)
AJ Corp purchased a new warehouse building for $500,000 and placed it in service April 1 of year 1. What is AJ’s depreciation deduction for the building in year 1?
$9,095 depreciation deduction. The warehouse is nonresidential real property, and was placed in service during the fourth month of the year, so the applicable percentage from the MACRS table is 1.819%. $500,000 original basis * 1.819% = $9,095.
Ray and Anthea are married and file a joint return. For 2025 they have $19,030 in itemized deductions. Would they want to use itemized deductions, the standard deduction, or both for 2025? Standard deduction amounts are:
MFJ=$31,500; MFS or single=$15,750; HoH= $23,625
Standard Deduction of $31,500 for Married Filing Jointly is better because it is greater than their itemized deductions. Taxpayers cannot take both the standard and itemized deductions!
Barry and Inez fully support their 18-year-old grandson Peter, who lives with them all year. Peter is a US resident and is not married. Can Barry and Inez claim Peter as a dependent, and if so, what type of dependent?
Yes, Peter is a qualifying child. Peter is a US resident, does not file a joint return with a spouse (since he is unmarried), and meets the four tests to be a qualifying child: Relationship (he is their grandchild); Age (under 19, and younger than the taxpayers Barry and Inez); Residence (lived with taxpayers over half the year); and support (Peter did not provide >50% of his own support).
True or false: taxpayers must use the same depreciation method for tax that they do for GAAP. Explain your answer.
False. Taxpayers typically use MACRS (or an exception like Sec. 179 or bonus depreciation) to calculate depreciation for tax purposes, which is different from the methods used for GAAP purposes.
How are capital gains treated differently for individuals versus corporations? How are capital losses treated differently for individuals versus corporations?
Capital Gains - only individuals get the preferential (lower) capital gains tax rates on long-term capital gains. Corporations pay their ordinary tax rate on capital gains regardless of holding period.
Capital Losses - only individuals get to deduct $3K of capital losses against ordinary income, and net capital losses carry forward indefinitely. For corporations, capital losses can only offset capital gains, and net capital losses are carried back 3 years and forward 5 years.
Ruby Co. purchased machinery (7-year property) and placed it in service on August 1, 2025. This was the only personalty Ruby placed in service in 2025. The machinery’s purchase price was $200,000, and Ruby also paid $10,000 for delivery and installation of the machine. Assuming Ruby claims bonus depreciation on the machine, what is Ruby’s depreciation deduction for 2025 related to the machinery?
Under bonus depreciation, the machinery’s original tax basis of $210,000 is fully deductible in 2025.
The Mainkars (married filing jointly) have 2025 taxable income of $125,000, which includes $5,000 of long-term capital gain taxed at a preferential rate of 15%. Calculate the Mainkars’ federal income tax.
Ordinary income = $125,000 – $5,000 = $120,000
Tax on ordinary income = $11,157 + 22% * ($120,000 - $96,950) = $16,228
Tax on long-term capital gain = $5,000 * 15% = $750
Total federal income tax = $16,228 + $750 = $16,978
Explain how the support test for a qualifying child is different from the support test for a qualifying relative.
The support test for a qualifying child requires that the child does not provide >50% of their own support. To be a qualifying relative, however, the taxpayer claiming the dependent as a qualifying relative must be the one to provide >50% of the qualifying relative’s support.
What is included when determining the original tax basis of a capitalized asset?
Original tax basis includes: purchase price of the asset, sales tax, installation, delivery, and any other costs required to prepare the asset to be placed in service.
If paid in property or services rather than cash, cost is FMV of property given or services performed.
Cost also includes amounts borrowed (debt) to acquire asset.
On April 10, Ying sold 100 shares of Meta stock for $300 per share. Her cost basis in the stock was $340 per share. She repurchased 100 shares of Meta stock for $298 per share on April 22. What gain or loss does Ying recognize for tax purposes on the April 10 sale?
No gain or loss recognized. Although Ying realizes a loss of $4,000 on the April 10 sale ($30k amount realized - $34k basis), she repurchased the same stock within 30 days and so the wash sale rules apply.
On July 1 of Year 1, Laurel Inc. purchased and placed in service a small office building with an original basis of $900,000. Laurel sold the building on November 5 of Year 3. How much MACRS depreciation may Laurel claim on this building in Year 3?
A full year of depreciation on the building (nonresidential real property) in year 3 would be $900,000 * 2.564% = $23,076.
Because Laurel sold it in November, adjust the year 3 depreciation to reflect only 10.5 months of depreciation instead of a full year. (As real property, the building follows the mid-month convention, so it is treated as if sold in the middle of November, i.e., 10.5 months into the year.)
23,076 * (10.5/12) = $20,191.50 depreciation
Otto is a single taxpayer in the 22% tax bracket and has itemized deductions for 2025 of $9,000. He has just learned that he is eligible for an additional deduction of $2,000. How much tax would this additional deduction save him if it is an above-the-line deduction? If it is an itemized deduction?
(Note: the standard deduction for a single taxpayer in 2025 is $15,750.)
If above-the-line deduction: 2,000*.22 = $440 tax savings. As an above-the-line deduction, Otto can take the deduction whether he itemizes or not.
If itemized deduction: $0 tax savings. Even with the additional $2,000 deduction, Otto's itemized deductions are still just $11,000. He would still take the greater standard deduction, so the additional itemized deduction provides no tax savings.
Maria provides full financial support for her mother Olga, who lived all year at a nursing home in Maria’s city. Olga is unmarried, a U.S. citizen, and has $500 of income for the year. Can Maria claim Olga as a dependent, and if so, what type of dependent?
Yes, Maria can claim Olga as a qualifying relative. Olga is a US citizen, does not file a joint return with a spouse (since she is unmarried), and meets the three tests to be a qualifying relative: Relationship (she is Maria’s mother/ancestor); Support (Maria provides >50% of Olga’s support); and Gross Income (Olga has <$5,200 of gross income for the year).
What is bonus depreciation?
A provision which allows certain taxpayers to immediately deduct the cost of qualifying assets in the first year rather than over their applicable MACRS recovery period. Starting in 2025, 100% of the cost of qualifying assets can be deducted. Unlike Sec. 179, bonus depreciation is not limited to smaller businesses.