Question 1

Gain due to depreciation recapture is included in the netting of Sec. 1231 gains and losses.

Accepted Answer

The answer of Gain due to depreciation recapture is included...

Question 2

Sarah owned land with a FMV of $150,000 (adjusted basis $135,000) which is investment property (a capital asset). Sarah owned a second tract of land, a 1231 asset, with a FMV of $38,000 (adjusted basis $55,000). Both tracts were acquired in 2000 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, what is the amount that Sarah must report on her current year return?

Accepted Answer

The answer of Sarah owned land with a FMV of...

Question 3

Terry has sold equipment used in her business. She acquired the equipment three years ago for $50,000 and has recognized $30,000 of depreciation across the years in use. In order to recognize any Sec. 1231 gain, she must sell the equipment for more than

Accepted Answer

The answer of Terry has sold equipment used in her...

Question 4

A taxpayer acquired new machinery costing $50,000 three years ago. The taxpayer had elected Sec. 179 expensing to deduct the full cost in the year of acquisition. The taxpayer sells the machinery this year and realizes a $32,000 gain. Sec. 1245 will not require any ordinary income recapture on the sale of this asset due to the Sec. 179 expensing.

Accepted Answer

When a taxpayer elects to expense property under Sec.179, they must recapture any excess deduction under Sec.1245 if they sell the property at a gain. Therefore, the statement is false. In this scenario, the taxpayer must recapture up to $18,000 of ordinary income under Sec.1245 (the excess of the cost over the basis after the Sec.179 deduction).

Question 5

If a taxpayer has gains on Sec. 1231 assets, Secs. 1245 and 1250 must be applied first to determine any amounts recaptured as ordinary income, and any excess gain may then be netted with Sec. 1231 losses for possible
long- term capital gain treatment.

Accepted Answer

This statement is correct according to the rules of tax law. Sec. 1245 applies to depreciable personal property while Sec. 1250 applies to real property. Both of these sections require recapture of certain amounts as ordinary income before any remaining gain may be considered for Sec. 1231 treatment.

Question 6

During the current year, a corporation sells equipment for $300,000. The equipment cost $270,000 when purchased and placed in service two years ago and $60,000 of depreciation deductions were allowed. The results of the sale are

Accepted Answer

The equipment's adjusted basis is $210,000 ($270,000 cost - $60,000 depreciation). The sale price is $300,000, resulting in a gain of $90,000 ($300,000 - $210,000). The $60,000 depreciation is recaptured as ordinary income, and the remaining $30,000 is a Sec. 1231 gain.

Question 7

A taxpayer has a gain on Sec. 1245 property. None of the gain will be treated as Sec. 1231 gain unless the sale price exceeds the original cost.

Accepted Answer

This statement is true. Sec.1245 property includes certain types of personal property, and any gain realized on the sale of Sec.1245 property is generally treated as ordinary income rather than capital gain. However, if the sale price exceeds the original cost of the Sec.1245 property, any excess gain may be treated as Sec.1231 gain, which is preferentially taxed as long-term capital gain.

Question 8

The purpose of Sec. 1245 is to eliminate the advantage taxpayers would have if they were able to reduce ordinary income by depreciation deductions and also receive favorable Sec. 1231 treatment when the asset was sold.

Accepted Answer

This is the exact purpose of Sec. 1245, as stated in the question. It ensures that taxpayers cannot benefit from both depreciation deductions and favorable Sec. 1231 treatment when selling the same asset.

Question 9

Harry owns equipment ($50,000 basis and $38,000 FMV) and a building ($140,000 basis and $156,000 FMV), which are used in his business. Harry uses straight- line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Harry collects insurance proceeds equal to the assets' FMV. The tax result to Harry for this transaction is

Accepted Answer

The involuntary conversions are treated as Sec. 1231 gains and losses because both the equipment and the building were used in Harry's business and held for more than one year.

Question 10

Elaine owns equipment ($23,000 basis and $15,000 FMV) and a building ($136,000 basis and $148,000 FMV), which are used in her business. Elaine uses straight- line depreciation for both assets, which were acquired sever years ago. Both the equipment and the building are destroyed in a fire, and Elaine collects insurance proceeds eq the assets' FMV.
a. What is the tax treatment of these two transactions?
b. Assume that Elaine is only able to collect $3,000 from the insurance company for the equipment loss. What is treatment of the two transactions (assume the basis and insurance reimbursement remain the same for the building).

Accepted Answer

The answer of Elaine owns equipment ($23,000 basis and $15,000...

Question 11

Sec. 1245 can increase the amount of gain recognized on an asset.

Accepted Answer

The answer of Sec. 1245 can increase the amount of...

Question 12

During the current year, Hugo sells equipment for $150,000. The equipment cost $175,000 when placed in service two years ago, and $55,000 of depreciation deductions were allowed. The results of the sale are

Accepted Answer

The equipment is subject to Sec. 1245 recapture rules. The depreciation taken was $55,000, and the gain on sale is $30,000 ($150,000 sale price - $120,000 adjusted basis). The gain is recaptured as ordinary income under Sec. 1245 up to the amount of depreciation taken.

Question 13

If realized gain from disposition of business equipment exceeds total depreciation or cost recovery, a portion of the gain will receive Sec. 1231 treatment if the equipment's holding period is more than one year.

Accepted Answer

This is true. When a taxpayer sells business equipment and realizes a gain, the gain may be classified as either ordinary income or capital gain. However, if the equipment was held for more than one year, some or all of the gain may qualify for Section 1231 treatment, which provides special tax treatment for gains and losses from the sale or exchange of business property.

Question 14

Sec. 1245 recapture applies to all the following except

Accepted Answer

Sec. 1245 recapture applies to gains on the sale of depreciable personal property, not losses.

Question 15

Sec. 1245 ordinary income recapture can apply to buildings placed in service prior to 1987.

Accepted Answer

Sec. 1245 applies to tangible personal property and certain real property, including buildings, that have been depreciated. It requires recapture of ordinary income up to the amount of depreciation previously claimed when the property is sold, exchanged, or otherwise disposed of. This provision applies to buildings placed in service before 1987.

Question 16

The following are gains and losses recognized in 2018 on Ann's business assets that were held for more than one The assets qualify as Sec. 1231 property.  A summary of Ann's net Sec. 1231 gains and losses for the previous five- year period is as follows:  Describe the specific tax treatment of each of the current year transactions.

Accepted Answer

The answer of The following are gains and losses recognized...

Question 17

The following gains and losses pertain to Jimmy's business assets that qualify as Sec. 1231 property. Jimmy does have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary due to the depreciation recapture provisions has been eliminated.  Describe the specific tax treatment of each of these transactions.

Accepted Answer

The answer of The following gains and losses pertain to...

Question 18

The following gains and losses pertain to Arnold's business assets that qualify as Sec. 1231 property. Arnold doe have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary due to the depreciation recapture provisions has been eliminated.  Describe the specific tax treatment of each of these transactions.

Accepted Answer

The answer of The following gains and losses pertain to...

Question 19

Sec. 1245 applies to gains on the sale of depreciable personal property, but it generally does not apply to depreciable real property.

Accepted Answer

Sec. 1245 specifically applies to gains on the sale of depreciable personal property, while gains on the sale of depreciable real property are generally subject to Sec. 1250.

Question 20

If the accumulated depreciation on business equipment held longer than one year exceeds realized gain on the sale of the equipment, all of the realized gain will be treated as Sec. 1231 gain.

Accepted Answer

The answer of If the accumulated depreciation on business equipment...

Quiz 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals