Question 1

What are the carryover provisions for unused capital losses applicable to individuals?

Accepted Answer

Capital losses that cannot be used in the current year can be carried forward indefinitely to be applied against future capital gains.

Question 2

During the current tax year,the Jeckel Company has the following gains and losses from property transactions: $12,000 Section 1231 gain
$23,000 long-term capital gain
$21,000 Section 1231 loss
$4,000 Section 1231 gain
What is the amount and type of gain or loss reported by Jeckel for the year?

Accepted Answer

The net Section 1231 gain is $12,000 + $4,000 - $21,000 = -$5,000 (a net loss). The long-term capital gain is $23,000.

Question 3

Brent sold his personal car and some household furniture during the year.He had a $3,000 gain on the car but a $5,000 loss on the furniture.What is his recognized gain or loss included in taxable income as a result of these sales?

Accepted Answer

The answer of Brent sold his personal car and some...

Question 4

Coley Corporation has an $800 net short-term capital loss and a $6,000 net long-term capital gain in the current year.It also has an $8,000 long-term capital loss carryover from the prior year.What is Coley's capital loss carryover to the next year?

Accepted Answer

The first step is to offset the net short-term capital loss ($800) against the net long-term capital gain ($6,000), leaving us with a net long-term capital gain of $5,200. 
Next, we can use up to $3,000 of the remaining long-term capital losses to offset this gain. This will leave us with a long-term capital loss of $4,800. 
Finally, we add the remaining long-term capital loss carryover from the prior year ($8,000) to this amount to get a total capital loss carryover of $12,800. 
However, since the maximum amount of capital losses that can be deducted in a single year is $3,000, the excess $9,800 can be carried over to the following year. 
Therefore, Coley's capital loss carryover to the next year is $2,800 ($3,000 - $200).

Question 5

Which of the following is a capital asset?

Accepted Answer

Personal auto is considered a capital asset because it is a significant piece of property owned for personal use. Capital assets typically include property not used in a business operation, such as personal vehicles, homes, and investments.

Question 6

Caldwell Corporation sold a factory building for $300,000.The building originally cost $600,000 and had an adjusted basis of $200,000 due to the $400,000 depreciation taken when it was sold.What is Caldwell's Section 1231 gain on the sale of the property?

Accepted Answer

The answer of Caldwell Corporation sold a factory building for...

Question 7

Vero Corporation owns $200,000 of equipment used for its business and the building that the business is located in that is valued at $175,000.The business is successful and has investments in marketable securities valued at $45,000.What is the value of its capital assets?

Accepted Answer

The answer of Vero Corporation owns $200,000 of equipment used...

Question 8

An individual taxpayer has the following property transactions during the current year: Personal automobile owned 3 years $4,000 loss on sale
Business equipment owned 3 years $5,600 gain on sale
Factoring of receivables $6,200 loss
Common stock owned 7 months $3,500 gain on sale
How do these transactions affect the individual's AGI?

Accepted Answer

The gain from the sale of business equipment ($5,600) and the gain from the sale of common stock ($3,500) increase AGI. The loss from factoring receivables ($6,200) is deductible and decreases AGI. The personal automobile loss is not deductible. Net effect: $5,600 + $3,500 - $6,200 = $2,900 increase in AGI.

Question 9

Bobsy Company has a $14,000 net Section 1231 gain for the current tax year from its only property transaction.In the previous year,it had a $7,000 net Section 1231 loss.For the current year,the net Section 1231 gain will be taxed as:

Accepted Answer

The answer of Bobsy Company has a $14,000 net Section...

Question 10

Cliff owned investment stock purchased three years ago for $16,000 and bonds purchased six months ago for $9,800.When he needed money recently,he sold the stock for $13,800 and the bonds for $10,100.What is the amount and type of net gain or loss that Cliff will include in computing his taxable income?

Accepted Answer

In order to calculate the net gain or loss, we need to determine the gains and losses for each investment separately.

For the stock:
Sale price - Purchase price = Gain/loss
$13,800 - $16,000 = -$2,200 (long-term capital loss)

For the bonds:
Sale price - Purchase price = Gain/loss
$10,100 - $9,800 = $300 (short-term capital gain)

To calculate the net gain or loss, we add up the gains and losses:
-$2,200 (stock) + $300 (bonds) = -$1,900

Therefore, Cliff will include a long-term capital loss of $2,200 and a short-term capital gain of $300 in computing his taxable income. The net result is a long-term capital loss of $1,900, which is option C.

Question 11

Jason sells a piece of equipment for $43,000.The equipment was purchased four years ago for $56,000.It was depreciated using an accelerated method of depreciation.Its adjusted basis at the time of sale is $21,000.Straight-line depreciation would have been only $20,000.What is the amount and type of gain Jordan recognizes on this sale?

Accepted Answer

The equipment was depreciated using an accelerated method, which means that part of the depreciation was claimed under Section 1245. Therefore, the gain on the sale of the equipment is also treated as a Section 1245 gain. The formula for determining the gain is:
Selling Price - Adjusted Basis = Gain
$43,000 - $21,000 = $22,000
Therefore, the amount of gain recognized by Jason on this sale is $22,000 and it is a Section 1245 gain.

Question 12

On March 17,a calendar-year taxpayer sells a machine used in its business for $9,500.The machine was purchased sixteen months earlier for $9,000 and depreciation deductions of $1,800 have been taken.What is the amount and type of gain recognized on the sale?

Accepted Answer

The amount of gain recognized is calculated as follows: 
Sale price - adjusted basis = $9,500 - ($9,000 - $1,800) = $2,300.
Since the machine was used in the taxpayer's business and held for more than one year, the gain is classified as section 1231 gain. However, since $1,800 of the depreciation taken is considered Section 1245 recapture, only the remaining $500 is classified as section 1231 gain.

Question 13

Angel sells the following depreciable assets from her sole proprietorship: Asset Cost Age Gain/Loss
Office furniture $10,000 4 years ($2,400)
Truck $20,000 5 years 3,100
Bakery equipment $25,000 9 months (4,500)
What should Angel report on her income tax return relative to these property transactions?

Accepted Answer

- The gain/loss on the office furniture is a Section 1231 loss because it is being sold at a loss after being held for more than one year. This can offset any Section 1231 gains that Angel has had during the year. The loss is $2,400.
- The gain/loss on the truck is a Section 1245 recapture because it is being sold at a gain and was used in Angel's trade or business. The recapture amount is $3,100.
- The gain/loss on the bakery equipment is an ordinary loss because it was sold for less than its original cost and it had not been held for more than one year. The loss is $4,500.

Question 14

Paul has a $45,000 net Section 1231 gain in the current tax year from his only property transaction.Last year he had a $12,000 net Section 1231 gain,but two years ago he had a $51,000 net Section 1231 loss.If he has no other property transactions in the current year,Paul will treat the net Section 1231 gain as:

Accepted Answer

Section 1231 gains and losses are classified as either ordinary income or long-term capital gains, depending on the net amount for the tax year in question.

In Paul's case, he had a net Section 1231 loss two years ago, so that loss will be carried forward to offset any Section 1231 gains in future years. Last year, he had a net Section 1231 gain of $12,000, but since it was less than the previous year's loss, it was treated as ordinary income.

This year, he has a net Section 1231 gain of $45,000. We first need to offset this gain with the previous year's loss:

$45,000 (current year gain) - $12,000 (previous year gain) - $51,000 (previous year loss carryover) = -$18,000

Since the net result is negative, the entire amount will be treated as ordinary income, and there will be no long-term capital gain. Specifically, $39,000 will be ordinary income, and $6,000 will be treated as a Section 1245 gain (a type of ordinary income for certain types of property).

Therefore, the answer is D: $39,000 ordinary income; $6,000 long-term capital gain.

Question 15

Grill Corporation sold all of its business assets when it went out of business.Which of the following is a capital asset?

Accepted Answer

The answer of Grill Corporation sold all of its business...

Question 16

Alpha Corporation had income from operations of $30,000.What is the corporation's taxable income including the following property transactions: Gain on investment stock = $8,000;loss on machinery held three years = $6,000;$4,000 loss on equipment held 10 months;$4,000 gain on land used for six years for storage of trucks.

Accepted Answer

Taxable income = 
Income from operations + Gain on investment stock + Loss on machinery held three years + Loss on equipment held 10 months + Gain on land used for six years for storage of trucks 
= $30,000 + $8,000 - $6,000 - $4,000 + $4,000 
= $32,000

Question 17

Quidik Corporation sold a machine for $80,000 that it had acquired three years ago for $68,000.If its adjusted basis when sold was $50,000,what should Quidik report on its tax return as a result of this sale?

Accepted Answer

To determine the tax treatment of the sale, we first need to calculate the amount of depreciation deduction that Quidik claimed on the machine. Assuming straight-line depreciation over three years, the annual depreciation would be ($68,000 - $50,000) / 3 = $6,000. Therefore, the total depreciation claimed would be $6,000 x 3 = $18,000.

Since the machine was held for more than one year, the gain on the sale qualifies for Section 1231 treatment. The sale results in a Section 1231 gain of $80,000 - $50,000 = $30,000.

However, the portion of the gain attributable to depreciation recapture under Section 1245 must be treated as ordinary income. The amount of recaptured depreciation is $68,000 - $50,000 = $18,000.

Therefore, Quidik should report a Section 1245 recapture of $18,000 as ordinary income and a Section 1231 gain of $12,000 on its tax return, for a total gain of $30,000. Choice C is the only option that correctly reflects these calculations.

Question 18

The Walford Partnership sold an apartment building for $300,000 that it had purchased for $280,000 ten years ago.The partnership had taken $80,000 of depreciation deductions on the building.What is the amount and type of gain realized by the partnership?

Accepted Answer

The answer of The Walford Partnership sold an apartment building...

Question 19

A corporation sells a machine used for 9 years in its business for $22,000.The machine originally cost $120,000 and was fully depreciated.Its gain will be treated as:

Accepted Answer

Since the machine was fully depreciated, the entire amount of the sale will be treated as a gain. This gain will be classified as a Section 1231 gain, which is a capital gain on the sale of depreciable property used in a trade or business.

Question 20

During the current year,Mrs.Mayhew received a used computer as a gift from her son for her personal use.The computer has a current fair market value of $350 and cost her son $850.He took $400 of depreciation deductions while it was used in his business.Mrs.Mayhew uses the computer for several years and then sells it for $200.What is the amount and type of gain or loss that Mrs.Mayhew recognizes on the sale?

Accepted Answer

Mrs. Mayhew's basis in the computer is the lesser of the fair market value at the time of the gift ($350) or her son's adjusted basis ($450, which is $850 cost minus $400 depreciation). Since $350 is less, her basis is $350. She sells it for $200, resulting in a $150 loss ($350 basis - $200 sale price). However, personal use property losses are not deductible, so she recognizes $0 gain or loss.

Quiz 7: Property Dispositions