Two months ago, Dawes Inc. broke a multi-year lease on office space that it had occupied for four years. Three years ago, Dawes paid $85,300 to install carpeting and new electrical fixtures throughout the office. Accumulated depreciation through the date that Dawes vacated the office was $51,000. What is the tax consequence of Dawes' abandonment of the carpeting and fixtures?
A) Dawes has no tax consequence because it did not sell or exchange these assets.
B) $34,300 capital loss.
C) $34,300 ordinary loss.
D) $34,300 Section 1231 loss.

Question

Quizplus · Accepted Answer

Abandonment of carpeting and fixtures is treated as a loss of property and is deductible as an ordinary loss under the tax code. The loss is calculated as the adjusted basis of the property (cost minus accumulated depreciation) minus any salvage value. In this case, the adjusted basis is $85,300 - $51,000 = $34,300, and there is no salvage value since the property was abandoned. Therefore, the tax consequence of Dawes' abandonment is a $34,300 ordinary loss.

Two Months Ago, Dawes Inc