Question 1

Which of the following events could result in § 1250 depreciation recapture?

Accepted Answer

The answer of Which of the following events could result...

Question 2

Which of the following would not be included in the netting of § 1231 gains and losses?

Accepted Answer

Personal use property net casualty gain is not included in the netting of § 1231 gains and losses, as it is not considered a § 1231 asset. Only gains and losses from sales or exchanges of business property (such as land, buildings, and equipment) are included in the netting calculation.

Question 3

Blue Company sold machinery for $45,000 on December 23, 2012.The machinery had been acquired on April 1, 2010, for $49,000 and its adjusted basis was $14,200.The § 1231 gain, § 1245 recapture gain, and § 1231 loss from this transaction are:

Accepted Answer

The sale price ($45,000) minus the adjusted basis ($14,200) results in a gain of $30,800, which is fully recaptured under § 1245 as ordinary income. There is no § 1231 gain or loss.

Question 4

The following assets in Jack's business were sold in 2012:  The office equipment had a zero adjusted basis and was purchased for $8,000.The automobile was purchased for $2,000 and sold for $1,200.The ABC stock was purchased for $1,800 and sold for $3,200.In 2012 (the year of sale), Jack should report what amount of net capital gain and net ordinary income?

Accepted Answer

The gain or loss on each asset is calculated separately:

- Office Equipment: Since it had a zero adjusted basis, the entire sales price of $8,000 is treated as ordinary gain.
- Automobile: The sales price is $1,200 and the adjusted basis is $2,000, resulting in a capital loss of $800.
- ABC Stock: The sales price is $3,200 and the adjusted basis is $1,800, resulting in a long-term capital gain of $1,400.

The net capital gain is the sum of all capital gains and losses, which in this case is ($1,400 - $800) = $600 LTCG. The net ordinary income is the sum of all ordinary gains and losses, which in this case is $8,000 ordinary gain.

Therefore, the correct answer is C) $1,400 LTCG and $300 ordinary gain.

Question 5

Vertical, Inc., has a 2012 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2011.For 2012, Vertical's net § 1231 gain is treated as:

Accepted Answer

According to the rules, if a taxpayer has a net § 1231 gain for the year, it is treated as long-term capital gain. In this case, since Vertical Inc. had a net § 1231 gain of $67,000 in 2012, it will be treated as a long-term capital gain. However, since the company had a net § 1231 loss of $22,000 in 2011, that loss is treated as an ordinary loss. Therefore, the net gain for 2012 would be a combination of long-term capital gain ($67,000) and ordinary gain ($22,000), resulting in choice C being correct.

Question 6

Robin Corporation has ordinary income from operations of $30,000, net long-term capital gain of $10,000, and net short-term capital loss of $15,000.What is the taxable income for 2012?

Accepted Answer

The answer of Robin Corporation has ordinary income from operations...

Question 7

A barn held more than one year and used in a business is destroyed in a tornado. The barn originally cost $356,000 and was fully depreciated using straight-line depreciation. The barn was insured for its $543,000 replacement cost minus a deductible of $1,000. Which of the statements below is correct concerning these facts?

Accepted Answer

Since the barn was fully depreciated, there is no tax basis remaining in the asset. Therefore, there is no taxable gain or loss from the disposition of the barn. However, the insurance proceeds received ($542,000) will be included in income and subject to tax. Special netting rules apply in this situation to determine the tax treatment of the insurance proceeds.

Question 8

Verway, Inc., has a 2012 net § 1231 gain of $55,000 and had a $62,000 net § 1231 loss in 2011.For 2012, Verway's net § 1231 gain is treated as:

Accepted Answer

When a taxpayer has a net § 1231 gain, it is treated as long-term capital gain. Therefore, Verway's 2012 net § 1231 gain of $55,000 is treated as an ordinary gain. This is the best choice because it correctly identifies the gain as ordinary, but not as a loss or a capital loss/gain.

Question 9

Orange Company had machinery destroyed by a fire on December 23, 2012.The machinery had been acquired on April 1, 2010, for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed and Orange received $30,000 of insurance proceeds for the machine and did not replace it.This was Orange's only casualty or theft event for the year.As a result of this event, Orange has:

Accepted Answer

The insurance proceeds of $30,000 exceed the adjusted basis of $14,200, resulting in a gain. The gain is subject to § 1245 recapture, which means the gain is treated as ordinary income to the extent of the depreciation taken. The entire gain of $15,800 ($30,000 - $14,200) is recaptured as ordinary income under § 1245.

Question 10

Red Company had an involuntary conversion on December 23, 2012.The machinery had been acquired on April 1, 2010, for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it.This was Red's only casualty or theft event for the year.As a result of this event, Red initially has:

Accepted Answer

The adjusted basis of the machinery was $14,200 and the insurance proceeds were $10,000, resulting in a casualty loss of $4,200.

Question 11

Which of the following assets held by a retail business is a § 1231 asset?

Accepted Answer

A factory building used in the business and held more than one year is considered a § 1231 asset. Inventory is not considered a § 1231 asset, nor are short-term assets like a machine held less than one year, or accounts receivable.

Question 12

Which of the following creates potential § 1245 depreciation recapture and potential § 1231 gain?

Accepted Answer

Depreciable equipment held for more than a year and sold for more than its original cost creates potential § 1245 depreciation recapture and potential § 1231 gain.

Question 13

White Company acquires a new machine for $35,000 and uses it in White's manufacturing operations.A few months after White places the machine in service, it discovers that the machine is not suitable for White's business.White had fully expensed the machine in the year of acquisition using § 179. White sells the machine for $5,000 in the tax year after it was acquired, but held the machine only for a total of 10 months. What was the tax status of the machine when it was disposed of and the amount of the gain or loss?

Accepted Answer

The machine was an ordinary asset because it was used in the business and held for less than a year. The gain is calculated as the selling price ($5,000) minus the adjusted basis ($0, since it was fully expensed), resulting in a $5,000 gain.

Question 14

Tan, Inc., has a 2012 $50,000 long-term capital gain included in its $185,000 taxable income.Which of the following is correct?

Accepted Answer

The answer of Tan, Inc., has a 2012 $50,000 long-term...

Question 15

Copper Corporation sold machinery for $27,000 on December 31, 2012.The machinery had been purchased on January 2, 2009, for $30,000 and had an adjusted basis of $21,000 at the date of the sale.For 2012, what should Copper Corporation report?

Accepted Answer

The answer of Copper Corporation sold machinery for $27,000 on...

Question 16

An individual had the following gains and losses during 2012 on property held for the long-term holding period: sale of Orange common stock ($8,000 gain); sale of real property used in the taxpayer's business ($1,800 loss); destruction of real property used in the taxpayer's business by fire ($1,000 loss).Which of the following statements is correct?

Accepted Answer

The sale of real property used in the taxpayer's business is a § 1231 loss, which is treated separately from other gains and losses. The destruction of real property used in the taxpayer's business by fire is also a § 1231 loss, and it can be netted against any § 1231 gains. However, it cannot be netted against gains from the sale of non-business property (such as the Orange stock). Therefore, the fire loss does not affect the Orange stock sale gain, and it cannot be used to reduce the real property sale loss.

Question 17

Which of the following assets held by a cash basis accounting firm is a § 1231 asset?

Accepted Answer

A desk (choice B) held for more than one year is considered a § 1231 asset because it is a depreciable asset used in the business. A computer (choice D) held for more than one year and fully depreciated under § 179 when acquired is also considered a § 1231 asset. Therefore, the correct choice is E (both B and D are § 1231 assets). Choices A and C are not considered § 1231 assets.

Question 18

Spencer has an investment in two parcels of vacant land.Parcel 1 is a capital asset and parcel 2 is a § 1231 asset.Spencer already has short-term capital loss for the year he would like to offset with capital gain.Spencer has § 1231 lookback loss that exceeds the gain from the disposition of either land parcel.Spencer only wants to sell one land parcel and each of them would yield the same amount of gain.The gain that would be recognized exceeds the short-term capital loss Spencer already has.Which of the statements below is correct?

Accepted Answer

The answer of Spencer has an investment in two parcels...

Question 19

Vertigo, Inc., has a 2012 net § 1231 loss of $64,000 and had a $32,000 net § 1231 gain in 2011.For 2012, Vertigo's net § 1231 loss is treated as:

Accepted Answer

A net § 1231 loss is treated as an ordinary loss, allowing the taxpayer to deduct it against ordinary income. Therefore, in this case, Vertigo's 2012 net § 1231 loss of $64,000 can be deducted against ordinary income in 2012. The fact that they had a net § 1231 gain of $32,000 in 2011 does not affect the treatment of the current year's loss.

Question 20

Which of the following is correct?

Accepted Answer

All of the given scenarios may affect adjusted gross income. Improperly classifying a § 1231 loss as a capital loss (A), improperly classifying a capital loss as a § 1231 loss (B), and misclassifying a § 1231 gain as a short-term capital gain (C) can all affect the calculation of taxable income and ultimately adjusted gross income. Similarly, misclassifying a short-term capital gain as a § 1231 gain (D) may also impact adjusted gross income.

Quiz 14: Property Transactions: Capital Gains and Losses, 1231, Recapture Provisions