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5. Sold 500 shares of XYZ Corp. stock at $20 per share. Green purchased these shares 2 years prior at $22 per share. Three weeks subsequent to the sale, Green purchased 100 shares of XYZ stock at $18 per share.

$(800). A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. Part of this transaction qualifies as a wash sale since Green purchased 100 shares of XYZ Corp stock 3 weeks prior to the sale of the 500 shares of XYZ Corp. stock. The loss attributed to these 100 shares will not be recognized; 20% (100 shares ÷ 500 shares) of the loss is disallowed. The total realized loss is $1,000 ($10,000 - 11,000). Therefore, $200 ($1000 realized loss × 20%) is disallowed. $800 of the realized loss is recognized.

7. Sold 2,000 shares of TWX Corp. stock at $8 per share. Green received 4,000 shares of TWX in a tax-free transaction for 2,000 shares of WTX Corp. stock he purchased in the prior year for $2 per share.

$14,000. In a tax-free transaction, the basis of property received is the same as the basis of the property given up. Green gave up 2,000 shares with a basis of $2 each, or a total basis of $4,000, for 4,000 shares of TWX. Therefore, Green had a basis in the TWX stock of $1 each (4000 shares ÷ $4,000 basis of property given up). Green later sold 2,000 shares of TWX stock at $8 per share for a total amount realized of $16,000. Green's recognized gain is thus equal to $14,000 ($16,000 amount realized - $2,000 basis).

Alan Kupper had the following transactions during 2017: Gain of $7,000 on sale of Sec. 1202 stock purchased on January 15, 2016, and sold on April 15, 2017. Gain of $5,000 on sale of common stock purchased on October 15, 2016 and sold on March 25, 2017. Receipt of a $10,000 installment payment on an installment contract created in 2009 when Kupper sold for $100,000 (exclusive of 6% interest on installments) land acquired in 1997 for $20,000. The contract provides for 10 equal annual principal payments of $10,000 beginning on July 1, 2009, and ending on July 1, 2018. What is the amount of Kupper's net capital gain and appropriate tax-rate basket(s) for 2017?

$15,000 ($7,000 - 28% basket, $8,000 - 15% basket). This answer is correct. Net capital gains (losses) are first computed separately for each tax rate basket. The sale of stock in April resulted in a long-term capital gain in the 28% rate basket because the asset was Sec. 1202 stock. The sale of stock in March resulted in a short-term capital gain because the stock was held less than 1 year. The sale of land in 2009 resulted in a long-term capital gain because it had been held more than 1 year. Kupper's installment receipt in 2017 is considered long-term, and $8,000 of it represents gain in the 15% rate basket under the installment method. Long-Term Gains 28% Basket 15% Basket Sale of Sec. 1202 stock in April 2017 $7,000 Installment payment [($10,000 ÷ $100,000) × $80,000] $8,000 Net capital gain $7,000 $8,000 The total net capital gain is $15,000, of which $7,000 is subject to a maximum gain rate of 28% and $8,000 is taxed at a maximum rate of 15%. Kupper's $5,000 net short-term capital gain is not included in the net capital gain. However, the net short-term capital gain is included in taxable income (but is not given any special treatment).

During the year, Rich Poorer had several transactions concerning capital assets. His Social Security number is 000-12-8899. His transactions are listed in the exhibits.

$15,000. The basis of property is generally its cost. Cost includes cash paid and any debt that the property is subject to. Basis also includes expenditures for major improvements and costs to acquire title. 24 months. The character of gain on property disposition varies with the holding period. The holding period of an asset is measured in calendar months, beginning on the day after acquisition. $5,250. The general rule is that the basis of property acquired by gift is the donor's adjusted basis, increased by any gift tax attributable to appreciation. Rich's father had a cost basis in the ring that was unadjusted for depreciation, and no gift tax was imposed on the transfer. Thus, Rich has a transferred basis of $5,250 in the ring. 144 months. The holding period of property generally begins on the date following the date of acquisition. However, if property has the same basis in whole or in part as it had in the hands of a prior holder, the holding period of the prior holder is added (tacked on) to the present owner's holding period. $12,000. Transferee takes a cost basis. 2 months. The holding period of an asset is measured in calendar months, beginning on the day after acquisition. $5,750. Deduction of loss realized on a wash sale is disallowed. The sale of stock on May 15 was a wash sale because identical stock was repurchased within 30 days (on May 31). The disallowed loss is added to the basis of the stock that was subsequently purchased on May 31. The basis in the stock purchased is $5,750 ($4,500 cost + $1,250 disallowed loss). 144 months. The holding period of stock acquired in a wash sale includes the holding period of the originally purchased stock. $9,750. The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent's death. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution, if earlier. Rich's basis in the silver on July 31, 2017, is the $9,750 fair market value on the date of death. No basis adjustment is made for estate taxes paid.

$45,000 of insurance recovery received from a 5-year-old building that was destroyed in a fire. The building was used in a business, had a FMV of $65,000, and an adjusted basis of $50,000.

$5,000 and Ordinary Loss. Sec. 1033 nonrecognition does not apply to losses. The amount of the casualty loss is the adjusted basis, net of amounts recovered, e.g., insurance proceeds. Thus, taxpayer recognizes a loss of $5,000 ($50,000 adjusted basis - $45,000 recovery). Sec. 1231 property is depreciable or real property used in a trade or business and held for more than 1 year, and nonpersonal capital assets held for more than 1 year and involuntarily converted. If there is a net loss for the year from involuntary conversion of property, including by fire, used in the trade or business or capital assets held long-term for investment or in connection with a trade or business, the loss is treated as an ordinary loss. If so, even if the involuntarily converted properties are otherwise Sec. 1231 property, the gains and losses are not included further in Sec. 1231 computations.

Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year). A machine used in the business was sold for $40,000. It cost $33,000 when purchased 3 years ago, and its adjusted tax basis when sold was $21,000. Depreciation had been recorded on an accelerated basis; straight-line depreciation would have been $9,900. A $50,000 insurance recovery on a small warehouse destroyed by fire was received. It was used in the business and depreciated using the straight-line method. Its adjusted tax basis at the date of the fire was $52,400. A new warehouse was rebuilt at a cost of $60,000. What is the basis of the new warehouse?

$60,000 This answer is correct. The realized loss was fully recognized, so the basis of the new warehouse is its cost of $60,000.

On June 15, Year 2, Tim sold 100 shares of Y Corporation stock for $20 per share. Tim's records relating to the sale reflect the following information: Date Purchased Number of Shares Adjusted Basis June 1, Year 1 40 $25 January 2, Year 2 60 $10 Determine the gain or loss from the stock sale.

$600 short-term capital gain and $200 long-term capital loss. Under Reg. 1.1012-1(c), the basis and holding period of stock which was acquired in several different transactions is determined by specific identification of the stock sold. If the stock sold cannot be identified to any purchase or lot, it is assumed to be the first stock purchased or acquired; i.e., the FIFO (first-in, first-out) rule is applied. In this transaction the number of shares sold equals the number purchased. So, the issue is determining the amount and character of gain. The first 40 shares were purchased on June 1, Year 1, for $25 per share. The sale produces a long-term capital loss of $200 ($800 - $1,000). The remaining 60 shares were purchased on January 2, Year 2, for $10 per share. Their sale results in a short-term capital gain of $600 ($1,200 - $600).

Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year). A machine used in the business was sold for $40,000. It cost $33,000 when purchased 3 years ago, and its adjusted tax basis when sold was $21,000. Depreciation had been recorded on an accelerated basis; straight-line depreciation would have been $9,900. A $50,000 insurance recovery on a small warehouse destroyed by fire was received. It was used in the business and depreciated using the straight-line method. Its adjusted tax basis at the date of the fire was $52,400. A new warehouse was rebuilt at a cost of $60,000. What is the combined tax effect of these two transactions on the proprietor's Form 1040?

$7,000 long-term capital gain; $12,000 ordinary income; and $2,400 ordinary loss. 40-21=19 33-21=12 19-12-7 52400-50000=2400

The following data pertain to installment sales of personal property made by Fred Dale, an accrual-method taxpayer, in his retail furniture store: Year of Installment Collections Sale Sales Profit in Year 3 Year 1 $ 50,000 $15,000 $10,000 Year 2 100,000 40,000 30,000 Year 3 150,000 75,000 40,000 These sales were not under a revolving credit plan. Under the installment method, Dale should report gross profit for Year 3 of

$75,000 The installment method is usually disallowed for dispositions of property by dealers. This includes any disposition of (1) personal property, if the person regularly sells such personal property on the installment plan, and (2) real property held by the taxpayer for sale to customers in the ordinary course of his or her trade or business. Exceptions are made for property used or produced in the trade or business of farming and, if so elected, sales of residential lots or timeshares, subject to interest payments on the deferred tax. Dale is excluded from installment sale deferral because the disposition of his property falls under "personal property of a type regularly sold by the person on the installment plan." Because he does not qualify, he must recognize all of his profit in Year 3, which is stated in the question as $75,000.

Adam Samuel Corporation purchased real property for $740,000. A year later, Adam Samuel had to pay $31,000 in taxes to the city where the property was located for the city's plan to refurbish the neighborhood, resulting in an increase in value.

$771,000. Taxes assessed for local benefit that tend to increase the value of real property are added to the property's adjusted basis. Thus, the adjusted basis would be the original purchase price of the property plus the taxes paid.

On March 30, 2015, Frank and his wife Susan each bought 1,000 shares of Wolf Corporation stock at $12 per share. Two years later, the stock price started to drop. On April 15, 2017, Susan sold all her 1,000 shares at $11 per share and Frank sold 500 shares at $11 per share. Half a month later, on April 30, 2017, the stock price dropped to $10 per share and Frank bought 1,500 shares at the market price.

0. The sale of stock on April 15, 2017, is treated as a wash sale. In a wash sale, spouses are treated as one person. A loss realized on a wash sale of stock is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. The disallowed loss on the April 15, 2017, sale is $1,500 [1,500 shares × ($12 - $11)]. $0. The sale of stock on April 15, 2017, is treated as a wash sale. In a wash sale, spouses are treated as one person. A loss realized on a wash sale of stock is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. The disallowed loss on the April 15, 2017, sale is $1,500 [1,500 shares × ($12 - $11)]. $16,500. Basis in the stock Frank purchased on April 30, 2017, is $16,500 (1,500 shares purchased × $10 + $1,500 disallowed loss from prior sale). 2 years and 1 month. The holding period includes that of the originally purchased stock, which is from March 30, 2015, to April 30, 2017, 2 years and 1 month.

Sam purchased 100 shares of stock in Year 1 for $2,500. The company had no earnings and profits in Year 2 or Year 3. In Year 3, he received a return of capital distribution on that stock of $2,000, and in Year 4, he received a second return of capital distribution on that stock of $2,000. What amount should he report on his Year 4 tax return?

1,500 as long-term capital gain income. A return of capital is a tax-free distribution that reduces a stock's basis by the amount of the distribution. If a shareholder's basis is reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain.

Delilah gave her son Charles a gold watch that had been in the family for years. At the date of the gift, Delilah's basis in the watch was $4,000, and the fair market value of the watch was $7,000. No gift taxes were paid.

4,000. When a gift is made, the basis in the hands of the recipient is equal to the adjusted basis of the donor at the time of the gift, increased by any gift tax paid attributable to appreciation.

Sand purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sand sold 50 shares of Eastern for $7,000. Fifteen days later, Sand purchased 25 shares of Eastern for $3,750. What is the amount of Sand's recognized gain or loss?

A current loss realized on a wash sale of securities is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. Although Sand sold 50 shares of Eastern on February 1, it reacquired 25 more shares of Eastern less than 30 days later. Thus, the 25 shares that Sand reacquired 15 days later do not contribute to the recognized loss on February 1. If the total realized loss on February 1 is $2,000 ($9,000 basis of shares sold - $7,000 sales price), only half is recognized because only half is not subsequently reacquired.

In Year 1, Janice had the following transactions in Jacky, Inc., common stock: Shares Price Jan. 01 - Purchase 500 $25 May 12 - Sale 500 $23 May 28 - Purchase 250 $22 Oct. 15 - Sale 100 $18 What is Janice's deductible capital loss?

A current loss realized on a wash sale of securities is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. On May 12, Janice sold 500 shares, which resulted in a potential capital loss deduction of $1,000. With the wash sale rule in place, the loss is deferred until the replacement shares are sold. Since Janice repurchased 250 shares within 30 days, the capital loss from 250 shares (half of the 500 shares) cannot be deducted. Thus, $500 of the capital loss is disallowed (deferred) and the rest of the capital loss ($500) is recognized. The disallowed loss is added to the basis of the stock repurchased in the wash sale. Therefore, the basis of 250 repurchased shares is $6,000 (250 repurchased shares × $22 purchase price + $500 disallowed loss). The new cost basis of the stock is $24 ($6,000 ÷ 250 shares). On October 15, Janice sold 100 shares of the stock. Thus, she recognizes a capital loss of $600 [100 shares × ($24 new basis - $18 selling price)]. Therefore, Janice's total deductible capital loss is $1,100 ($500 from the first sale + $600 from the second sale).

Ms. Pear owned 1,000 shares of YZ Corporation which she had purchased in Year 1 at a cost of $12 per share. In Year 3, she received a nontaxable 20% stock dividend. The shares were identical to those she already held. She ended the year owning 1,200 shares. In Year 5, the stock split 2 for 1 which increased her holdings to 2,400 shares at the end of the year. In Year 8, she sold 400 shares. What was her basis in the 400 shares of stock sold?

A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The same is true for a stock split. The basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share is calculated as total basis divided by total number of shares. Ms. Pear's total number of shares is 2,400. Her basis is $5 per share ($12,000 ÷ 2,400 shares = $5).

Which of the following costs is includible in inventory under the uniform capitalization rules for merchandise manufactured by a company for sale to its customers?

A manufacturer capitalizes costs for construction of real or tangible personal property to be used or sold in a trade or business. Both direct and most allocable indirect costs necessary to prepare the inventory for its intended use must be capitalized. Therefore, the engineering costs are direct costs that are related to the construction or creation of the inventory to be sold by the manufacturer.

Mr. and Mrs. Able are investors in a mutual fund that is not part of a qualified retirement plan. For the current year, the fund notified them that it had allocated a $9,500 long-term capital gain to their account. Of this total, only $4,500 was distributed in the current year. In addition, the fund paid $500 in federal income taxes on their behalf. What is the amount of long-term capital gain that the Ables should report on their current-year tax return?

A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by shareholders, but a credit is allowed for their proportionate share of any tax on the capital gain paid by the mutual fund. Therefore, the Ables must report the full $9,500 as a long-term capital gain.

In 2017, Roe Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $2,031,000. What portion of the cost may Roe elect to treat as an expense rather than as a capital expenditure?

A taxpayer may treat up to $510,000 of the cost of Sec. 179 property acquired during 2017 as an expense rather than as a capital expenditure. The amount deductible under Sec. 179 must be reduced by the amount by which the cost of Sec. 179 property placed in service during the year exceeds $2,030,000. Thus, $510,000 is reduced by $1,000 ($2,031,000 - $2,030,000) to find the allowable Sec. 179 deduction.

The uniform capitalization method must be used by Manufacturers of tangible personal property Retailers of personal property with $2 million in average annual gross receipts for the 3 preceding years

A taxpayer that produces tangible personal property must capitalize all of the direct costs of producing the property and an allocable share of indirect costs regardless of whether the property is sold or used in the taxpayer's trade or business. A retailer that acquires property for resale must capitalize the costs unless the taxpayer's annual gross receipts for the 3 preceding years do not exceed $10 million.

Which of the following will decrease the basis of property?

All of the answers are correct. This answer is correct. Basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed). A return of capital is a tax-free distribution that reduces a stock's basis by the amount of the distribution. If a shareholder's basis has been reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain. The basis of the replacement property from an involuntary conversion is reduced by any gain not recognized and any loss recognized.

Martha, filing single, purchased her home on July 7, Year 1, and lived in it continuously until its sale on January 7, Year 3, due to a qualified hardship. Her gain on the sale of the home is $300,000. She did not exclude any gain on any other home sale during this time. What is the maximum amount of gain she may exclude on this sale?

An individual may exclude $250,000 ($500,000 for married individuals filing jointly) on the sale of a principal residence, provided (s)he lived there for at least 2 years. Additionally, a pro rata exclusion is available if the sale occurred prior to 2 years, provided the sale was as a result of a qualified hardship, including a change in job locations, health reasons, or other unforeseen circumstances. Therefore, Martha may exclude $187,500 [(18 ÷ 24) × $250,000].

On October 1, 2017, Donald Anderson exchanged an apartment building, having an adjusted basis of $375,000 and subject to a mortgage of $100,000, for $25,000 cash and another apartment building with a fair market value of $550,000 and subject to a mortgage of $125,000. The property transfers were made subject to the outstanding mortgages. What amount of gain should Anderson recognize in his tax return for 2017?

Anderson's realized gain is Fair market value of building received $ 550,000 Mortgage on old building 100,000 Cash received 25,000 Total amount realized $ 675,000 Less: Basis of old building $375,000 Mortgage on new building 125,000 (500,000) Realized gain (only $25,000 recognized) $ 175,000 Under Reg. 1.1031(d)-2, excess mortgage incurred cannot be netted against cash received to reduce the amount of boot received.

Which of the following will decrease the basis of property?

Basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed). A return of capital is a tax-free distribution that reduces a stock's basis by the amount of the distribution. If a shareholder's basis has been reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain. The basis of the replacement property from an involuntary conversion is reduced by any gain not recognized and any loss recognized.

Mr. and Mrs. Taylor realized a $115,000 loss on the sale of their principal residence. They have owned and used the residence for the past year. Due to Mr. Taylor's job, the Taylors moved and claimed this exclusion 18 months ago.

Do not recognize gain (loss). Losses on the sale of a principal residence are not recognized, regardless of whether the taxpayers are eligible to take the exclusion.

On February 16, Year 1, Fred Samson purchased 100 shares of Oscar Corporation stock at $40 per share. On July 28, Year 5, he sold the 100 shares at $25 per share. On August 10, Year 5, his wife purchased 50 shares of Oscar Corporation at $30 per share. These are the only capital asset transactions by the Samsons during Year 5. In computing his taxable income for Year 5, Fred may deduct, from his ordinary income of $15,000, a capital loss in the amount of

Fred sold 100 shares of stock on July 28, and his wife subsequently purchased 50 shares of the same corporation's stock on August 10. Consequently, 50 of the shares Fred sold are not eligible for the capital loss deduction because this would be considered a wash sale (spouses are treated as the same taxpayer for this purpose). Under Sec. 1091, a wash sale occurs when substantially the same securities are purchased within 30 days of being sold for a loss. A capital loss deduction is available for the other 50 shares. The sale of 50 shares resulted in a $750 loss. The full amount of the loss is deductible. Sales price (50 × $25) $ 1,250 Less: Adjusted basis (50 × $40) (2,000) Long-term capital loss $ (750)

A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245, Gain from Dispositions of Certain Depreciable Property?

Gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized. The realized gain in excess of the depreciation taken may be treated as a gain from the sale or exchange of Sec. 1231 property. The $20,000 gain realized is less than the depreciation taken ($30,000).

Good, a C corporation, sells an automobile to its sole shareholder for $4,500. Good's adjusted basis in the automobile is $12,000, and the fair market value is $5,000. What is the amount of loss that is recognized by Good?

Good realized a $7,500 loss ($4,500 sale price - $12,000 adjusted basis). A loss from the sale or exchange of property between related parties is not deductible. Related parties include a corporation and an individual who owns more than 50% of the stock. Since Good sold the automobile to its sole shareholder, the loss is not deductible. The shareholder takes a cost basis (i.e., $4,500). Any gain realized on a subsequent sale to an unrelated party is recognized only to the extent it exceeds the previously disallowed loss (i.e., $7,500).

Sold 1,225 shares of ABC Corp. stock at $9 per share. Green purchased 600 shares several years ago at $30 per share. Three years ago, when the stock price was $21, there was a 2-for-1 stock split. Two years ago, when the stock price was $25, there was a 3-for-2 stock split. No other shares were sold by Green prior to Year 2.

Green's original basis in the shares was $30 per share, or $18,000 (600 × $30). When the 2-for-1 stock split occurred, Green's shares doubled to 1,200 (600 × 2 ÷ 1), while the basis stayed at $18,000. Each share had a basis of $15 ($18,000 ÷ 1,200). The 3-for-2 stock split caused Green's shares to increase to 1,800 (1,200 × 3 ÷ 2), while the basis stayed at $18,000. Each share had a basis of $10 ($18,000 ÷ 1,800). The stock price at the time of the stock splits is a distracter, as it does not affect the basis. Green's amount realized is $11,025 (1,225 × $9). His basis in those shares is $10 per share (as calculated above), or $12,250. Therefore, Green has a loss of $1,225 ($11,025 - $12,250).

Dunn received 100 shares of stock as a gift from Dunn's grandparent. The stock cost Dunn's grandparent $32,000, and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report from the sale of the stock?

If the FMV on the date of the gift is less than the donor's basis, the donee has a dual basis for the property. Loss basis. The FMV at the date of the gift is used if the property is later transferred at a loss. Gain basis. The donor's basis is used if the property is later transferred at a gain. If the property is later transferred for more than FMV at the date of the gift but for less than the donor's basis at the date of the gift, no gain (loss) is recognized. Therefore, Dunn does not report any gain or loss ($32,000 gain basis > $29,000 sale price > $27,000 loss basis).

Jake sold an office building in Year 1 on the installment method for $5.5 million. At the end of Year 2, he is still owed $4.9 million on the debt from the sale. In which situation will Jake have to pay interest on the deferred tax of his Year 2 sales if they are all installment sales with no payments in Year 2?

In Year 2 he sells a rental duplex for $160,000 and an apartment complex for $4.9 million. Interest is charged under Sec. 453A on the deferred tax of nondealer installment sales of over $150,000 involving any type property. Excluded is personal use property, property produced or used in the trade or business of farming, time shares and residential lots. The interest is only charged if the obligation is outstanding at the end of the year and the taxpayer has nondealer installment receivables totaling over $5 million at the end of the year from sales of property described above that occur during the year. If in Year 2 Jake sells a rental duplex for $160,000 and an apartment complex for $4.9 million, his Year 2 installment sales (in receivables at year end) will exceed $5 million. Therefore, the interest will be charged on the deferred tax.

Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings,

Juan must pay self-employment tax on the earnings of the business. Self-employed taxpayers must pay a self-employment tax on the earnings of their business. The FICA tax liability is imposed on net earnings from self-employment at the employer rate plus the employee rate.

An individual had the following capital gains and losses for the year: Short-term capital loss $70,000 Long-term gain (unrecaptured Section 1250 at 25%) 56,000 Collectibles gain (28% rate) 10,000 Long-term gain (15% rate) 20,000 What will be the net gain(loss) reported by the individual and at what applicable tax rate(s)

Long-term gain of $16,000 at the 15% rate. This answer is correct. The short-term capital loss will be used first to offset net gain for the highest long-term rate basket, then to offset the next highest rate basket and so on. The $70,000 loss will entirely offset the $10,000 collectibles gain and the $56,000 unrecaptured Section 1250 gain. The remaining $4,000 will partially offset the $20,000 15% long-term gain leaving $16,000 of long-term gain at a 15% rate.

With regard to depreciation computations made under the general MACRS method, the half-year convention provides that

One-half of the first year's depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year's depreciation is allowed for the year in which the property is disposed of.

A transportation company realized a loss upon the exchange of two charter buses for eight taxis that will be rented to customers in the same fashion as the buses.

Recognize gain (loss) in full. Personal properties are of a like kind if they are of a like class. Automobiles, such as taxis, are not in the same asset classes as buses. Since the assets are not of a like kind, the loss must be recognized.

Patrick owned an office building that was destroyed by a tornado. The building had a tax basis of $350,000, and Patrick received $425,000 from his insurance company. He used that entire amount to purchase securities as part of his new plan to retire and play the stock market

Recognize gain (loss) in full. Property is involuntarily converted if the conversion is the result of destruction. If the property is converted in nonqualified proceeds, such as insurance proceeds, any gain realized may be deferred as long as the proceeds are used to purchase qualified replacement property. If the proceeds are not properly reinvested, the entire gain is recognized.

Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer's depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain?

Section 1245 property is depreciable personal property (e.g., office furniture). Gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized. The realized gain in excess of the depreciation taken may be treated as a gain from the sale or exchange of Sec. 1231 property (i.e., capital gain). The realized gain of $27,700 is greater than the depreciation taken ($20,700) by $7,000. Because the holding period is greater than one year, the gain is long-term.

Donny owns and leases a coal mine to Brian. The lease agreement states that Brian will pay Donny $4 per ton royalty on coal mined. What is Brian's percentage depletion deduction for the current year from the information given below? Gross income from coal $250,000 Income from trucking coal 20,000 Royalty paid Donny 30,000 Taxable income on coal (excluding depletion) 40,000 Coal depletion rate 10%

Section 611(a) authorizes a reasonable allowance for depletion of mines, oil and gas wells, other natural deposits, and timber. Percentage depletion (for other than oil and gas wells) is provided in Sec. 613 as the specified percentage (10% for coal) of the gross income from the property (excluding any rents or royalties paid or incurred by the taxpayer with respect to the property). This depletion allowance may not exceed 50% of the taxpayer's taxable income from the property computed before the allowance for depletion. Percentage depletion is the lesser of 10% of gross income, i.e., ($250,000 - $30,000 royalty) × 10% = $22,000; or 50% of taxable income, i.e., $40,000 × 50% = $20,000. Brian's percentage depletion deduction is thus limited to $20,000 (50% of his taxable income).

For 2017, Mr. G has a short-term capital loss of $4,000, a short-term capital gain of $1,900, a short-term capital loss carryover from 2015 of $700, a long-term capital gain of $800 from property held for 3 years, and a long-term capital loss of $1,500 from property held for 4 years. Mr. G is in the 35% marginal tax bracket. What is Mr. G's deductible loss in 2017?

Short-term capital gains and losses and long-term capital gains and losses are first netted to determine the capital loss deduction. The carryover from 2015 retains its character as a short-term capital loss and is netted with the other short-term transactions. Short-term: ($1,900 - $4,000 - $700) $(2,800) Long-term (15% basket): ($800 - $1,500) (700) Capital loss $(3,500) Since the loss computed above exceeds $3,000, the amount deductible is limited to the lesser of $3,000 or taxable income (Sec. 1211). Long-term capital losses of $500 are carried forward to the 28% basket.

Ms. Orchard purchased a duplex in Year 1. She lived in one unit as her principal residence and rented out the other unit until she sold the duplex in February Year 15 (the current year). In April Year 15, she bought and lived in a small single home. She did not replace the rental property. Her records showed the following: Duplex Original cost $100,000 Capital improvements 30,000 Depreciation until date of sale (rental unit only) 40,000 Selling price 250,000 Selling expenses 20,000 What is the amount of gain that Ms. Orchard may exclude in Year 15?

Since there are two units to the duplex, the calculations must be divided in half between the personal residence and the rental property. Accordingly, the realized gain is $50,000 [($125,000 sales price - $10,000 selling expenses) - ($50,000 cost of residence + $15,000 capital improvements)]. The depreciation does not reduce the basis of the residence portion because it is attributed to the rental unit only. The $50,000 realized gain is excluded because Ms. Orchard owned and occupied the residence for at least 2 years.

Rich is a cash-basis, self-employed air-conditioning repair technician with current-year gross business receipts of $20,000. Rich's cash disbursements were as follows: Air-conditioning parts $2,500 Yellow Pages listing 2,000 Estimated federal income taxes on self-employment income 1,000 Business long-distance telephone calls 400 Charitable contributions 200 What amount should Rich report as net earnings from self-employment?

The $20,000 gross receipts would be reduced by the $2,500 for parts, the $2,000 in advertising expense, and the $400 in telephone expense. This $15,100 is net income from self-employment. Net earnings from self-employment is net income from self-employment reduced by the employer's portion of FICA taxes (0.0765) times the taxpayer's net income from self-employment. Thus, the $15,100 should be reduced by an additional $1,155 ($15,100 × 0.0765), resulting in net earnings from self-employment of $13,945.

Mr. Patel sold a piece of land he had purchased for $40,000. The buyer paid cash of $50,000 and transferred to Mr. Patel a piece of farm equipment having a fair market value of $30,000. The buyer also assumed Mr. Patel's $10,000 loan on the land. Mr. Patel paid selling expenses of $5,000. What is Mr. Patel's recognized gain on this sale?

The amount realized under Sec. 1001 includes money received, fair market value of other property received, and any liabilities of which the seller is relieved. Mr. Patel realized $90,000 ($50,000 cash + $30,000 fair market value equipment + $10,000 liability relieved). Under Reg. 1.263(a)-2, commissions reduce the amount realized. Section 1001(a) provides that the gain from the sale of property is the excess of the amount realized over the adjusted basis. Therefore, Mr. Patel recognized a gain of $45,000. Amount realized $90,000 Less: Commissions paid (5,000) Net proceeds $85,000 Less: Adjusted basis (40,000) Realized and recognized gain $45,000

Allen owns 100 shares of Prime Corp., a publicly-traded company, which Allen purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Prime stock was $62 per share. On February 1, Year 3, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share. What amount should Allen recognize as long-term capital gain income on his Form 1040, U.S. Individual Income Tax Return, for Year 3?

The basis in the old stock is "split" and allocated to the new stock. Therefore, the basis in the new stock is $50 per share ($10,000 ÷ 200 shares), and the total basis in sold shares is $5,000 ($50 × 100 shares). Gain is any excess of the amount realized over adjusted basis. All gain realized is currently recognized unless an exception applies. Therefore, the recognized gain is $1,500 [$6,500 - $5,000].

John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, 2017, amounted to $1 million. For the year ended December 31, 2017, Ral's book income before federal income tax was $300,000. Included in the computation of this $300,000 was the following: Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, 2017, and is amortizing it over a 48-month period.) $6,000 What amount is deductible in Ral's 2017 return for purchase of the dealer's franchise?

The cost of certain intangibles acquired (not created) in connection with the conduct of a trade or business or income-producing activity is amortized over a 15-year period, beginning with the month in which the intangible is acquired. A franchise is a qualified intangible. Thus, Ral may deduct $1,600 ($48,000 ÷ 15 × 6/12).

Don invested in Ho Ho Mutual Fund by purchasing 100 shares on March 1, Year 1. On the first day of every month, the Ho Ho fund pays a dividend that Don elected to have reinvested in the Ho Ho fund. Don received five additional shares each month. On April 15, Year 2, Don sold his entire interest (165 total shares) in the Ho Ho fund. How many of the Ho Ho fund shares sold by Don qualify for the long-term holding period?

The holding period of an asset for purposes of long-term gain treatment is 1 year from the date of acquisition, not including the day of acquisition but including the day of disposition. In this case, the only dividend reinvestment received more than 1 year away from the date of sale was the one received 4/1/Yr 1. The other shares were received less than 1 year from the date of sale.

Kuo sells residential rental property to his son Karl for $100,000. Karl gives Kuo $1,000 and an installment note for the balance of $99,000. Kuo's basis is $50,000. Karl pays Kuo $4,000 in Year 1. In Year 2, after paying Kuo $5,000, Karl sells the property for $70,000. Which of the following statements about this situation is correct?

The recognized gain for an installment sale in any year is equal to the gross profit ratio multiplied by the amount of payments received in the year. In this case, the gross profit is $50,000 ($100,000 received - $50,000 basis), and the gross profit percentage is 50% ($50,000 gross profit ÷ $100,000 total contract price). In Year 1, Karl pays $1,000 up front and makes an additional $4,000 of payments for a total of $5,000. Therefore, the recognized gross profit is $2,500 ($5,000 × 50%).

An individual had the following capital gains and losses for the year: Short-term capital loss $70,000 Long-term gain (unrecaptured Section 1250 at 25%) 56,000 Collectibles gain (28% rate) 10,000 Long-term gain (15% rate) 20,000 What will be the net gain(loss) reported by the individual and at what applicable tax rate(s)?

The short-term capital loss will be used first to offset net gain for the highest long-term rate basket, then to offset the next highest rate basket and so on. The $70,000 loss will entirely offset the $10,000 collectibles gain and the $56,000 unrecaptured Section 1250 gain. The remaining $4,000 will partially offset the $20,000 15% long-term gain leaving $16,000 of long-term gain at a 15% rate.

On February 1, Year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ Co. for $200 per share. The taxpayer purchased the option for $50,000, which was to remain in effect for 6 months. The market declined, and the taxpayer let the option lapse on August 1, Year 1. The taxpayer would report which of the following as a capital loss on the Year 1 income tax return?

The taxpayer's basis in the option is the cost basis, or $50,000. Therefore, when the option lapsed, it became worthless, and the taxpayer realized a loss of $50,000. Since the taxpayer purchased the option on February 1, Year 1, and it lapsed on August 1 of the same year, the taxpayer held the asset for less than 1 year and the capital loss is short-term.

Soft Cream sells franchises to independent operators. In the current year, it sold a franchise to Edward Trent, charging an initial fee of $20,000 and a monthly fee of 2% of sales. Soft Cream retains the right to control such matters as employee and management training, quality control and promotion, and the purchase of ingredients. Mr. Trent's current-year sales amounted to $200,000. From the transactions with Trent, Soft Cream, an accrual-basis taxpayer, should include in its computation of taxable income

The transfer of a franchise is not treated as a sale or exchange of a capital asset if the transferor retains significant power, rights, or continuing interest with respect to the franchise. The right to control employee and management training, quality control and promotion, and the purchase of ingredients constitutes significant power, rights, and continuing interest. Therefore, the transfer is not a sale but merely a licensing agreement, and all the income ($20,000 initial fee and $4,000 monthly fee) is ordinary income.

Qualified small business stock, for purposes of applying rollover and exclusion rules, is stock that meets all the following tests except

Total gross assets of $100 million or less at all times after August 10, 1993 and before it issued the stock.

On June 15, Year 2, Tim sold 100 shares of Y Corporation stock for $20 per share. Tim's records relating to the sale reflect the following information: Date Purchased Number of Shares Adjusted Basis June 1, Year 1 40 $25 January 2, Year 2 60 $10 Determine the gain or loss from the stock sale.

Under Reg. 1.1012-1(c), the basis and holding period of stock which was acquired in several different transactions is determined by specific identification of the stock sold. If the stock sold cannot be identified to any purchase or lot, it is assumed to be the first stock purchased or acquired; i.e., the FIFO (first-in, first-out) rule is applied. In this transaction the number of shares sold equals the number purchased. So, the issue is determining the amount and character of gain. The first 40 shares were purchased on June 1, Year 1, for $25 per share. The sale produces a long-term capital loss of $200 ($800 - $1,000). The remaining 60 shares were purchased on January 2, Year 2, for $10 per share. Their sale results in a short-term capital gain of $600 ($1,200 - $600).

Earl Cook, who worked as a machinist for Precision Corp., lent Precision $1,000 in Year 1. Cook did not own any of Precision's stock, and the loan was not a condition of employment. In Year 5, Precision declared bankruptcy, and Cook's note receivable from Precision became worthless. What loss can Cook claim on his Year 5 income tax return?

When a nonbusiness bad debt becomes worthless, the loss that results is treated as a short-term capital loss. A nonbusiness bad debt is one that arises other than in connection with a trade or business of the taxpayer.

On July 1, Year 1, Lila Perl paid $90,000 for 450 shares of Janis Corporation common stock. Lila received a nontaxable stock dividend of 50 new common shares in November of Year 4. On December 20, Year 5, Lila sold the 50 new shares for $11,000. How much should Lila report in her Year 5 return as long-term capital gain?

When a shareholder receives a nontaxable stock dividend, the basis of the new stock must be determined by allocating to it part of the adjusted basis of the old stock (Sec. 307). The new shares (50) represented 10% of the total shares owned (500) after the stock dividend. Therefore, the basis of the new shares is $9,000 ($90,000 × 10%). The holding period of the new shares includes the holding period of the old shares, i.e., from July 1, Year 1 [Sec. 1223(5)]. This results in a $2,000 long-term capital gain as computed below. Sale proceeds $11,000 Less: Allocated basis (9,000) Realized and recognized gain $ 2,000

In the current year, Christian received a gift of property from his mother that had a fair market value of $50,000. Her adjusted basis was $20,000. She paid a gift tax of $9,000. What is Christian's basis in the property?

he basis of property acquired by gift is generally the donor's adjusted basis, increased by a gift tax paid applicable to appreciation. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax paid. Donor's adjusted basis $20,000 Gift tax * 7,500 $27,500 50000-20000/50000-14000*9000