Question 1

Nancy owned business equipment with a $16,950 adjusted basis and a $7,500 FMV that was destroyed by a tornado. The equipment was uninsured. As a result of this casualty, Nancy:

Accepted Answer

C) Nancy is allowed to deduct a $16,950 ordinary loss because the loss of uninsured business property due to a casualty (like a tornado) allows for the deduction of the adjusted basis of the property, not its fair market value (FMV).

Question 2

Which of the following statements about Section 1250 recapture rule is false?

Accepted Answer

The Section 1250 recapture rule applies to sales of depreciable realty by both noncorporate and corporate taxpayers.

Question 3

Delta Inc. generated $668,200 ordinary income from operations this year. It also recognized $3,910 recaptured ordinary income, $5,000 net Section 1231 gain, and $14,600 net capital loss on the sale of assets. Compute Delta's taxable income.

Accepted Answer

Delta's taxable income is calculated by adding its ordinary income ($668,200) to its recaptured ordinary income ($3,910), resulting in $672,110. Section 1231 gains and capital losses affect the composition of income but do not change the total taxable income calculated from ordinary income and recaptured income in this context.

Question 4

Firm F purchased a commercial office building for business use in 2009 for $965,000. This year, the firm sold the building for $1 million. Accumulated MACRS depreciation through date of sale was $275,000. Which of the following statements is true?

Accepted Answer

The correct answers are based on the calculation of gain and the treatment of depreciation recapture and Section 1231 gain. The original purchase price was $965,000, and the accumulated MACRS depreciation was $275,000, resulting in an adjusted basis of $690,000 ($965,000 - $275,000). The sale price was $1 million, leading to a total gain of $310,000 ($1,000,000 - $690,000). The depreciation recapture (ordinary income) is up to the amount of accumulated depreciation, and the remaining gain is treated as Section 1231 gain, which can be taxed at a more favorable rate. Both corporate and noncorporate taxpayers recognize the $310,000 gain, but the treatment of the gain (between ordinary income and Section 1231 gain) applies specifically to corporations, while noncorporate taxpayers would recognize it as a Section 1231 gain.

Question 5

Delour Inc. was incorporated in 2014 and adopted a calendar year. Here is a schedule of Delour's net Section 1231 gains and (losses) reported on its tax returns through 2019. $\begin{array}{lr}2014&2015&2016&2017&2018&2019\\$(4,900)&\$-0-&\$-0-&\$-0-&\$(12,000)&\$-0-
\end{array}$
 In 2020, Delour recognized a $50,000 gain on the sale of business land. How is this gain characterized on Delour's tax return?

Accepted Answer

Delour has a net Section 1231 loss of $16,900 from the past five years (2014 and 2018). The first $16,900 of the 2020 gain is recaptured as ordinary income, and the remaining $33,100 is treated as Section 1231 gain.

Question 6

Proctor Inc. was incorporated in 2014 and adopted a calendar year. Here is a schedule of Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2019. $\begin{array}{llcc}
2014&2015&2016&2017&2018&2019 \
\$-0-&\$(3,800)&\$9,040&\$(15,900)&\$-0-&\$-0-
\end{array}$
 In 2020, Proctor recognized a $25,000 gain on the sale of business land. How is this gain characterized on Proctor's tax return?

Accepted Answer

To determine how the gain on the sale of business land is characterized on Proctor's tax return, we need to first net all of Proctor's Section 1231 gains and losses from previous years. The net gain from the years 2014 through 2019 is $15,900.

Next, we need to consider the current year gain of $25,000. This gain is characterized as a Section 1231 gain since it comes from the sale of business land.

Lastly, we need to compare the current year Section 1231 gain of $25,000 to the net Section 1231 gain from previous years of $15,900. Since the current year gain is greater than the previous year's net gain, we must treat the entire $25,000 gain as ordinary income.

Therefore, the answer is C: $15,900 ordinary gain and $9,100 Section 1231 gain.

Question 7

Bastrop Inc. generated a $169,000 ordinary loss from operations this year. It also recognized $35,920 recaptured ordinary income, $18,000 net Section 1231 loss, and $125,750 net capital gain on the sale of assets. Compute Bastrop's net operating loss.

Accepted Answer

NOL = (OL + ROL) - (CL + RCL)= ($169,000 + $18,000) - ($125,750 + $35,920)= $187,000 - $161,670= $25,330

Question 8

Mr. and Mrs. Churchill operate a small business. This year, the Churchills sold a commercial office building used in their business for $1.5 million. They purchased the building in 1999 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. The Churchills should characterize the $638,000 gain recognized on sale as:

Accepted Answer

Since the property was used in the Churchills' business and held for more than one year, the gain should be classified as a Section 1231 gain. Since the amount of depreciation claimed ($538,000) is less than the amount of gain realized ($638,000), the entire gain should be classified as a Section 1231 gain.

Question 9

Mr. and Mrs. Marley operate a small business. This year, the Marleys sold a commercial office building used in their business for $1.1 million. They purchased the building in 2006 for a cost of $900,000 and have deducted $300,000 MACRS depreciation through date of sale. The Marleys should characterize the $500,000 gain recognized on sale as:

Accepted Answer

The gain should be characterized as a Section 1231 gain because the building was used in the Marleys' business and held for more than one year. The sale resulted in a gain of $500,000, which is the amount realized ($1.1 million) minus the adjusted basis ($600,000 - $900,000 purchase price + $300,000 MACRS depreciation). Since it is a Section 1231 gain, it will be classified as long-term capital gain if there is a net Section 1231 gain for the year.

Question 10

Zeron Inc. generated $1,349,600 ordinary income from operations this year. It also recognized $29,200 recaptured ordinary income, $21,000 net Section 1231 gain, and $14,900 net capital loss on the sale of assets. Compute Zeron's taxable income.

Accepted Answer

Zeron's taxable income is calculated by adding ordinary income, recaptured ordinary income, and net Section 1231 gain, then subtracting the net capital loss: $1,349,600 + $29,200 + $21,000 - $14,900 = $1,384,900.

Question 11

Several years ago, Nipher paid $70,000 to purchase equipment to use in its business. This year, it sold the equipment for $76,500. Accumulated MACRS depreciation through date of sale was $18,000. Determine the amount and character of Nipher's gain recognized.

Accepted Answer

To determine the amount and character of Nipher's gain recognized, we need to calculate the adjusted basis of the equipment first. 
Adjusted basis = Purchase price - Accumulated depreciation
Adjusted basis = $70,000 - $18,000
Adjusted basis = $52,000

Since the selling price is higher than the adjusted basis, Nipher has a gain on the sale. We need to determine the character of the gain based on the type of asset sold.

Since the equipment was held for more than one year and used in Nipher's business, it is considered a Section 1231 asset. The gain on the sale of a Section 1231 asset can be either ordinary or capital, depending on whether the asset was sold at a gain or loss overall in the current year.

In this case, the equipment was sold at a gain overall, so we need to compare the amount of the gain to the amount of any losses from other Section 1231 assets sold in the same year. If the gains exceed the losses, the gain will be a Section 1231 gain.

Since we don't have any information about other Section 1231 gains or losses for Nipher, we can assume that the $6,500 gain is a Section 1231 gain. The remaining $18,000 gain is ordinary income, since it represents the portion of the selling price that exceeds the adjusted basis but is not a Section 1231 gain.

Therefore, the amount and character of Nipher's gain recognized is $18,000 ordinary gain and $6,500 Section 1231 gain, which is choice D.

Question 12

Twelve years ago, Mr. and Mrs. Bathgate purchased a business. This year, they sold the business for $750,000 lump-sum payment. The business had the following balance sheet assets.  As a result of the sale, the Bathgates should recognize:

Accepted Answer

The answer of Twelve years ago, Mr. and Mrs. Bathgate...

Question 13

Irby Inc. was incorporated in 2014 and adopted a calendar year. Here is a schedule of Irby's net Section 1231 gains and (losses) reported on its tax returns through 2019. $$\begin{array} { c c c c c c } 
2014 & 2015 & 2016 & 2017 & 2018 & 2015 \
\$ ( 4,500 ) & \$ ( 3,000 ) & \$ ( 7,890 ) & \$ 45,600 & \$ - 0 - & \$ 1,300
\end{array}$$ In 2020, Irby recognized a $14,750 gain on the sale of business land. How is this gain characterized on Irby's tax return?

Accepted Answer

The $14,750 gain is characterized as a Section 1231 gain because net Section 1231 gains are treated as long-term capital gains if the gains exceed the losses for the tax year. The previous losses do not change the character of the current year's gain.

Question 14

Michael sold machinery used in his business for $50,000. He purchased the equipment three years ago for $55,000 and deducted $22,800 MACRS depreciation through the date of sale. Compute and characterize Michael's gain on sale.

Accepted Answer

To calculate Michael's gain on sale, we need to start with the adjusted basis of the machinery, which is the original purchase price minus the MACRS depreciation claimed.

Adjusted basis = $55,000 - $22,800 = $32,200

Next, we need to determine the amount of the sale proceeds that constitute taxable gain. This is calculated as:

Taxable gain = Amount realized - Adjusted basis

Amount realized = $50,000

Taxable gain = $50,000 - $32,200 = $17,800

Since the machinery was used in Michael's business, the gain is classified as an ordinary gain, not a capital gain. This is because the machinery was considered to be "Section 1245 property," which includes tangible personal property used in a trade or business.

Therefore, the correct answer is C) $17,800 ordinary gain.

Question 15

Lettuca Inc. generated a $77,050 ordinary loss from operations this year. It also recognized $5,920 recaptured ordinary income, $55,000 net Section 1231 loss, and $7,840 net capital loss on the sale of assets. Compute Lettuca's net operating loss.

Accepted Answer

The net operating loss is calculated by combining the ordinary loss from operations with the net Section 1231 loss and the recaptured ordinary income. The net capital loss is not included in the net operating loss calculation. Thus, the net operating loss is $77,050 + $55,000 - $5,920 = $126,130.

Question 16

This year, Adula Company sold equipment purchased in 2015 at a cost of $117,200. Accumulated depreciation through date of sale was $33,000. Which of the following statements is false?

Accepted Answer

The answer of This year, Adula Company sold equipment purchased...

Question 17

Kuong Inc. sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building in 2001 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain recognized on sale as:

Accepted Answer

We first need to calculate the adjusted basis of the building:
Cost basis: $1.4 million
Accumulated depreciation: $538,000
Adjusted basis: $862,000 ($1.4 million - $538,000)

The gain recognized on the sale is the selling price minus the adjusted basis:
Gain recognized: $638,000 ($1.5 million - $862,000)

Since the building was used in a corporate business, the gain is classified as Section 1231 property.

To determine how much of the gain is ordinary versus Section 1231, we need to look at the netting rules. In general, gains and losses from the sale of Section 1231 property are netted together to determine whether there is a net gain or loss for the year. If there is a net gain, it is treated as Section 1231 gain. If there is a net loss, it is treated as an ordinary loss.

In this case, we don't have any losses to net against the gain, so the entire $638,000 gain will be treated as Section 1231 gain.

However, we still need to calculate the breakdown of the gain between ordinary and Section 1231. If the building had been held for more than one year (which it has), the maximum amount of gain that can be treated as ordinary is the amount of depreciation previously claimed on the building. In this case, Kuong has claimed $538,000 of MACRS depreciation, so the maximum amount of gain that can be treated as ordinary is $538,000.

The remaining gain of $100,000 ($638,000 - $538,000) will be treated as Section 1231 gain.

Therefore, the best choice is B: $107,600 ordinary gain and $530,400 Section 1231 gain.

Question 18

This year, Izard Company sold equipment purchased several years ago at a cost of $48,500. Accumulated depreciation through date of sale was $18,900. Which of the following statements is false?

Accepted Answer

The answer of This year, Izard Company sold equipment purchased...

Question 19

B&I Inc. sold a commercial office building used in the corporate business for $862,000. B&I purchased the building in 2010 for a cost of $700,000 and had deducted $167,200 MACRS depreciation through date of sale. B&I should characterize the $329,200 gain recognized on sale as:

Accepted Answer

The answer of B&I Inc. sold a commercial office building...

Question 20

Which of the following assets is not a Section 1231 asset?

Accepted Answer

Office furniture held for eight months is not a Section 1231 asset. To be considered a Section 1231 asset, an asset must be used in a trade or business and held for more than one year. Business equipment held for four years and land used in a business and held for 16 years meet these criteria and are therefore Section 1231 assets.

Quiz 8: Property Dispositions