Ch 10 (Basis, Depreciation, Asset Categorization)
Jake recently purchased a new machine for his business. The price of the machine was $15,000, but Drew also paid $200 in sales tax, $500 in freight, and $2,000 in installation and testing costs. What is Drew's basis in the new machine?
$17,700
Basis includes: "not only its purchase price, but also any amounts paid for sales tax, freight, installation and testing of the asset, and any other costs necessary to acquire the asset and get it into operation."
A capital asset must be held for how long to be considered long-term for capital gain taxation?
More than one year.
One year or less = short-term
True or false: Depreciable property or real property used in a trade or business is considered an ORDINARY INCOME ASSET
False
How soon must a replcament property be identified in order for a like-kind exchange to occur?
14 days
30 days
45 days
90 days
45 days from the sale of the original property
Passive activity losses are tax-deductible up to _______
Passive income
Antonio purchased 100 shares of Yum! Brands stock five years ago for $4,000. He just gave those shares to his son, R.J, and the value of the 100 shares of stock on the date of the gift was $2,000.
What would the basis for calculating capital gain or loss if R.J. sold the shares for $1,000?
$2,000
Double-basis rule for gifting an asset with lower FMV than the donor's basis.
Bertha owns stock in JoshCo, inc. She bought one share of stock for $2,200 last year, and it is now worth $1,700. Bertha decides to sell the stock to take the loss against her income for the year.
14 days after the sale, Bertha sees on CNN that JoshCo, inc. stock is predicted to be one of the most profitable stocks over the next year. She repurchases her share at $1,700.
How much loss was realized? How much can be recognized?
$500 realized, $0 recognized. Wash sale!
1. The property is depreciable real or personal property used in a trade or business or for the production of income
2. the owner has a long-term holding period on the asset (more than 1 year)
True or False: Like-kind properties can include similar property outside the United States, but the IRS must issue a private letter ruling approving the transaction
False! Like-kind property must be within the United States, no matter what.
The individual investor exception is ONLY available for which of the following passive activity losses?
a) lemonade stands
b) real estate rental losses
c) personal property rentals
d) recorded online seminar losses
Real estate rental losses up to $25,000
Subject to an AGI limit of $100,000, with a $0.50/dollar pahse out up to $150,000 AGI
For recovery period purposes, most cars are _-year class life assets, and residential real estate is depreciated over _ years.
5, 27.5
pg. 422 and 423
A client has the following gains/losses throughout the year:
$7,000 Short-term capital gain
$3,000 Short-term capital loss
$4,000 Long-term capital gain
$5,000 Long-term capital loss
What is their net gain or loss reportable on their tax return?
$3,000 Short-term capital gain
The character (short-term or long-term) of the resulting gain or loss is determined by the larger net number, not taking into account whether it was a gain or loss.
True or false: Section 1231 assets are subject to long-term capital gains taxation when sold for a gain, but short-term capital loss treatment if sold for a loss.
True: often referred to as the best of both worlds tax treatment
Jon bought his mountain home 6 years ago for $600,000. He lived exclusively in the mountain home for the entire 6 years. He sold it this year for $789,000. How much gain did Jon realize on the sale? How much will he recognize?
Realized: $189,000
Recognize: $0
Section 121 - Sale of personal residence exclusion, up to $250,000 of gain is excludable as long as the tests are met.
Joseph is starting a new business where he will be the only owner. He would like to have limited liability, but he would prefer flow-through taxation because he expects to have losses in the first few years. He is not concerned about incurring self-employment taxes. Which business entity might best suit Joseph's needs?
Single Member LLC
Kofi owns a catering company that specializes in banquet service. Several years ago, Kofi pruchased an ice sculpture freezer for $4,000 and has since taken $1,500 of depreciation. If Kofi sold the freezer for $3,500, how much ordinary gain and how much capital gain would he recognize?
$1,000 of ordinary gain (depreciation recapture) and $0 of capital gain
How much capital loss can a taxpayer deduct against their income in 2023?
$3,000. The excess is carried over to future tax years indefinitely.
After 25 years in business for herself, Amanda retired and closed the doors of her office. She gave her desk to her niece, Alondra, who recently completed her degree in a similar field and is opening her practice. Amanda originally paid $20,000 for the desk, and it was fully depreciated by the time she gave it to Alondra.
Alondra used the desk for five years, and then sold it for $7,000 when she decided to redecorate her office. How will Alondra treat the proceeds from the sale of the gift for income tax purposes?
$7,000 of ordinary income.
Basis and depreciation are carried over when a Section 1231 asset is gifted, and since the total possible depreciation recapture was $20,000, the whole amount of the sale is taxed as ordinary income.
Abigail owns a rental home worth $500,000. She bought the home in 2008 for $150,000. In 2023, she exchanged the home in a Section 1031 exchange for a rental beach house worth $700,000. To make up for the extra value of the new property, Abigail paid $200,000 in cash to the other party.
What would Abigails new basis in the rental beach house be?
$350,000. Gain on the similar property is deferrred, and boot increases the basis of the new property.
Mae is a 20 percent owner in Dawg Fans, LLC, a day-care center for dogs. She is also a 15 percent owner in Bailey Bros., LLC, a successful children's clothing store. She does not materially participate in either business. Her at-risk and loss/income for the current year is as follows:
• Dawg Fans - At-risk = $140,000; Loss of $300,000
• Bailey Bros. - At-risk = $50,000; Income of $130,000
Mae also has wage income of $80,000 and capital gain income of $30,000.
How much loss is suspended due to the at-risk rules? How much is suspended due to the passive activity loss rules?
$160,000 suspended due to at-risk rules
$10,000 suspended due to PAL rules
George has taxable income this year of $500,000. He purchased $120,000 worth of depreciable property this year and is trying to calculate his maximum §179 deduction. What is the correct amount of the 179 deduction?
$120,000
Take the lesser of (a) Taxable Income, or (b) Property Placed in Service (PPS) up to $1,080,000.
Remember: Section 179 provides business owners with an option to elect to expense property placed in service during the year instead of capitalizing the assets and depreciating them over their MACRS class life. pg. 431
James sells his Beanie Baby collection for $100,000 on eBay. He paid $45,000 for them in total. Jame's taxable income is $345,688, and he is single, placing him in the 35% tax bracket. How much tax would James pay on the sale of his Beanie Babies?
$55,000 * .28 = $15,400 in capital gains tax
Prior to his retirement, Robert ran a restaurant. 10 years ago, he purchased a vacuum sealer that is now known for it's rarity and dependability. He purchased it for $5,000, depreciated it fully, and it is now worth $8,000.
Robert donates the vacuum sealer to a food back that will use it to seal bags. What is Robert's allowable charitable deduction for the donation, assuming there is no ceiling imposed by his AGI?
$3,000.
Robert is generally entitled to a fair market value deduction for contributions of baking equipment to a charitable organization that will use it in its tax-exempt purpose. The potential depreciation recapture, however, must be subtracted from the fair market value to determine the tax deduction.
$8,000 - $5,000 = $3,000
Sean owned an office building in Oklahoma City worth $1.5 million. He bought the property for $1 million.
The building was destroyed by a tornado, and the entire value of the property was lost. Sean received a check from his insurance company later that year for the full value of the building and would like to reinvest it in a similar property.
How long does Sean have to reinvest the proceeds in a similar property to avoid paying tax on his capital gain?
Sean has 2 years from the last day of the year in which the tornado occured to purchase a similar property. Pg. 535
Peter had net Schedule C net income of $130,000 and would like to make a contribution to a Keogh profit sharing plan. What is the maximum contribution he can make this year?
$24,163
Step 1: calculate SE tax
$130,000 x 0.9235 = $120,055
$120,055 x 0.153 = $18,368 self-employment tax
Step 2: Calculate the self-employed individual's maximum contribution:
$130,000 - $9,184 (less ½ of self-employment taxes) = $120,816
$120,816 x 20% (maximum contribution rate for self-employed individuals)
= $24,163