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. 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 (Refundable) 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, 2024. What possible filing status(es) could apply to them for tax purposes in 2024?
Married filing jointly or married filing separately. Isaac and Marin are legally married as of December 31, 2024, 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
How do you calculate the amount realized in a property disposition (sale) transaction?
The amount realized on disposition of property includes cash received, FMV of any property received, and any debt relief on property disposition
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. 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 determined by the lesser of:
The Adjusted Basis of the property, or
The Fair Market Value (FMV) of the property on the date the asset is converted to business use
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
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 2024 they have $19,030 in itemized deductions. Would they want to use itemized deductions, the standard deduction, or both for 2024?
Standard Deduction of $29,200 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 Parker, who lives with them all year. Parker is a US citizen and is not married. Can Barry and Inez claim Parker as a dependent, and if so, what type of dependent?
Yes, Parker is a qualifying child. Parker is a US citizen, 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 (Parker 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 to calculate depreciation for tax purposes, which is different from the method(s) used for GAAP purposes. Taxpayers may also be able to accelerate depreciation deductions for tax purposes under a provision like Section 179 or bonus depreciation.
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 February 14 of Year 1. This was the only personalty Ruby placed in service in Year 1. The machinery’s purchase price was $200,000, and Ruby also paid $10,000 for delivery and installation. What is Ruby’s depreciation deduction for Year 1 related to the machinery?
$30,009 depreciation deduction. The machinery’s original tax basis is $210,000 (purchase price plus delivery & installation). Ruby will use the half-year convention since it is personalty and the mid-quarter exception doesn’t apply. The applicable percentage from the MACRS table is 14.29%. Depreciation for Year 1 = $210,000 * 14.29% = $30,009.
The Mainkars (married filing jointly) have 2024 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 = $10,852 + 22% * ($120,000 - $94,300) = $16,506
Tax on long-term capital gain = $5,000 * 15% = $750
Total federal income tax = $16,506 + $750 = $17,256
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. acquired and placed in service some equipment (5-year property) with an original basis of $250,000. This was the only asset that Laurel acquired and placed in service during Year 1. Laurel sold the equipment on November 10 of Year 3. How much MACRS depreciation may Laurel claim on this equipment in Year 3?
$24,000. The equipment follows the half-year convention for personalty, so this convention will apply in the year of sale (Year 3). A full year of depreciation for the equipment in Year 3 = $250,000 * 19.20% = $48,000. Applying the half-year convention for the year of sale, $48,000 * 1/2 = $24,000.
Otto is a single taxpayer in the 22% tax bracket and has itemized deductions for 2024 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 2024 is $14,600.)
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 <$5,050 of gross income for the year).
What is Section 179?
A provision which allows certain taxpayers to immediately deduct up to $1,220,000 (in 2024) of the cost of certain assets in the first year rather than over their applicable MACRS recovery period. Generally applies to smaller taxpayers.