ACC 570 EXAM 1

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?

$0 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). CH13

Conner purchased 300 shares of Zinco stock for $30,000 in 2001. On May 23, 2020, Conner sold all the stock to his daughter Alice for $20,000, its fair market value at the time. Conner realized no other gain or loss during 2020. On July 26, 2020, Alice sold the 300 shares of Zinco for $25,000. What was Alice's recognized gain or loss on her sale?

$0 The $5,000 realized gain ($25,000 proceeds - $20,000 basis) is recognized only to the extent it exceeds the previously disallowed loss of $10,000. Since the realized gain on the sale to an unrelated third party is less than the amount of disallowed loss, no gain is recognized. CH13

In June of the current year, Susan's mother gave her 100 shares of a listed stock. The donor's basis for this stock, which she bought 10 years ago, was $4,000, and market value on the date of the gift was $3,000. Susan sold this stock in July of the current year for $3,500. The donor paid no gift tax. What was Susan's reportable gain or loss in the current year on the sale of the 100 shares of stock gifted to her?

$0 To compute gain, a donee's basis is the same as the donor's basis, adjusted for gift tax. For computing loss, the lower of the donor's adjusted basis or the FMV of the property is used. 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, Susan reports neither gain nor loss. Gain Loss Amount realized $3,500 $3,500 Less: Basis (4,000) (3,000) No gain No loss CH13

Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, Year 1, and an additional 100 shares for $13,000 on December 30, Year 1. On January 3, Year 2, Smith sold the shares purchased on December 15, Year 1, for $13,000. What amount of loss from the sale of Core's stock is deductible on Smith's Year 1 and Year 2 income tax returns? Year 1 Year 2

$0 $0 The January 3, Year 2, sale was a wash sale because substantially the same stock (as that sold at a loss) was purchased within 30 days. The $2,000 loss realized on the wash sale is not recognized in Year 1 or Year 2. The disallowed loss is added to the basis of the stock purchased in the wash sale. CH14

In January Year 1, Kirk Kelly bought 100 shares of a listed stock for $8,000. In March Year 2, when the fair market value was $6,000, Kirk gave this stock to his cousin, Clara. No gift tax was paid. Clara sold this stock in June Year 3 for $7,000. How much is Clara's reportable gain or loss in Year 3 on the sale of this stock?

$0. This answer is correct.The basis of property received by gift is the donor's basis (transferred or carryover basis). If the fair market value of the property at the time of the gift is lower, however, the basis for purposes of determining loss is the fair market value. Clara's basis for gain is $8,000, and her basis for loss is $6,000. Therefore, since the stock was sold for $7,000, neither gain nor loss is recognized. Gain Loss Sales price $7,000 $7,000 Less: Basis(8,000) (6,000) Gain (loss) No gain No loss CH13

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?

$1,000 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. ch14

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?

$1,000 short-term capital loss. 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. ch14

Browne, a self-employed taxpayer, had 2020 business taxable income of $1,030,000 prior to any expense deduction for equipment purchases. In 2020, Browne purchased and placed into service, for business use, office machinery costing $1,035,000. This was Browne's only 2020 capital expenditure. Browne's business establishment was not in an economically distressed area. Browne made a proper and timely expense election to deduct the maximum amount. Browne was not a member of any pass-through entity. What is Browne's deduction under the election?

$1,030,000 Tangible and depreciable personal property can be expensed by up to $1,040,000 in 2020, the year of acquisition. This amount is reduced when the amount of Sec. 179 property placed in service in a given year exceeds $2,590,000. Since this limit does not apply, the maximum deduction would be $1,040,000; however, there are other limits. Section 179(b)(3)(A) limits the deduction to taxable income derived from the active conduct of any trade or business. In this case, the maximum deduction is $1,030,000. CH13

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?

$1,500 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]. ch14

Bob sold securities in Year 1. The sales resulted in a capital loss of $7,000. He had no other capital transactions. He and his wife Gloria decide to file separate returns for Year 1. His taxable income was $26,000. What amount of capital loss can he deduct on his Year 1 return and what amount can he carry over to Year 2?

$1,500 in Year 1 and $5,500 carry over to Year 2. If capital losses exceed capital gains for the tax year, the excess is taken into account as negative taxable income for up to $3,000 ($1,500 if married filing a separate return). Thus, Bob will deduct $1,500 in Year 1, and carry over $5,500 to Year 2. ch14

Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain?

$10,000 The amount of the gift is the FMV of the property given. However, the donee's basis in the gift is the same basis as it was in the donor's hands plus any gift taxes paid. CH13

A taxpayer owned land with a basis of $120,000, subject to a mortgage of $75,000. The taxpayer exchanged the land held for another parcel of land with a fair market value of $200,000 plus cash of $35,000, and the taxpayer was relieved of the mortgage on the relinquished land. The transaction qualified for like-kind exchange treatment. What amount of taxable gain will be recognized on the taxpayer's tax return for this exchange?

$110,000 The gain recognized on a like-kind exchange is equal to the lesser of the gain realized or boot received. Boot received includes cash, net liability relief, and the FMV of other nonqualified property. The total boot received is $110,000 ($35,000 cash + $75,000 liability relief). The gain realized is $190,000 ($200,000 + $35,000 + $75,000 - $120,000). The gain recognized is therefore $110,000, the lesser of the $190,000 gain realized and $110,000 boot received. CH13

For 2020, Mr. Opal had the following capital gains and losses :Short-term gains$ 4,300 Short-term loss from a partnership(3,000) Short-term gain from an S corporation22,500 Short-term carryover loss from 2018(5,700) Long-term gains (15% basket)7,500 Long-term losses (28% basket)(11,000) Determine the overall result of the transactions.

$14,600 short-term capital gain. A taxpayer's distributive shares of capital gains and losses from a partnership or an S corporation must be combined with the taxpayer's personal capital gains and losses. Mr. Opal has a net short-term capital gain of $18,100 ($4,300 + $22,500 - $3,000 - $5,700). Mr. Opal has long-term gains of $7,500 in the 15% rate basket and long-term losses of $11,000 in the 28% rate basket. The net loss in the 28% basket is used to reduce the net gain in the 15% basket. Therefore, the $11,000 of losses first offsets the $7,500 of gains in the 15% basket. The remaining long-term capital loss of $3,500 is then applied against the short-term capital gain of $18,100. The remaining $14,600 of capital gain is included in taxable income and is taxed as a short-term capital gain. CH14

Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $10,000. Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house, which is located in a federally declared disaster area. On the date of change in use, her property has a FMV of $180,000, of which $30,000 is for the land and $150,000 is for the house. Her depreciable basis for the house is

$150,000 For property converted into business use, the basis for depreciation is the lesser of the FMV of the property at the conversion date or the adjusted basis at conversion. Additionally, the $20,000 expenditure for permanent improvements would be capitalized as a betterment. Thus, Nia's adjusted basis in the house on the date of conversion is $178,000 ($160,000 beginning basis + $20,000 paid for permanent improvements - $2,000 casualty loss deduction as a result of federal declaration of a disaster area). The FMV of the house on the date of conversion is $150,000. Accordingly, Nia's depreciable basis for the house is $150,000. CH13

Lewis Brown bought four lots of land for $100,000. On the date of purchase, the lots had the following fair market values: Lot #1$25,000 Lot #2$31,250 Lot #3$20,625 Lot #4$48,125 What is the basis to Lewis of Lot #3?

$16,500 When more than one asset is purchased for a lump sum, the basis of each is computed by apportioning the total cost based on the relative FMV of each asset. Lot #3 has a FMV that is 16.5% of the FMV of all of the lots purchased [$20,625 ÷ ($25,000 + $31,250 + $20,625 + $48,125)]. Thus, the basis of Lot #3 is $16,500 ($100,000 × 16.5%). CH13

Dr. Chester is a cash-basis taxpayer. His office visit charges are usually paid on the date of visit or within 1 month. However, services rendered outside the office are billed weekly and are usually paid within 2 months as patients collect from insurance companies. Information relating to Year 1 is as follows: Cash received at the time of office visits $ 35,000 Collections on accounts receivable 130,000 Accounts receivable, January 1 16,000 Accounts receivable, December 31 20,000 Dr. Chester's gross income from his medical practice for Year 1 is

$165,000 CASH BASIS JUST ADD UP CASH Since Dr. Chester is a cash-basis taxpayer, income is recognized at the time cash is actually or constructively received, whichever is earlier. Dr. Chester's Year 1 income consists of the $35,000 received at the time of office visits plus the $130,000 collected on accounts receivable, for a total of $165,000. Since Dr. Chester is not an accrual-basis taxpayer, the amount of accounts receivable at the beginning and end of the year do not affect his gross income. ch16

In Year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer's adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?

$165,000 Selling Price + Mortgage assumed - Adjusted Basis -Selling Expenses Gross profit equals the contract price minus the cost of goods sold. The contract price equals $250,000 ($200,000 for the property + $50,000 assumed mortgage), and the cost of goods sold equals $85,000 ($75,000 adjusted basis + $10,000 selling expenses). Therefore, the gross profit on the installment sale equals $165,000 ($250,000 - $85,000). ch16

Leker exchanged a building that was used exclusively for business and had an adjusted tax basis of $200,000 for a new building. The new building had a fair market value of $100,000, and Leker also received $30,000 in cash. What was Leker's tax basis in the acquired building?

$170,000 The basis of property received in a like-kind exchange is equal to the adjusted basis of the property surrendered, decreased by any boot received and increased by any gain recognized or boot given. Since this is a like-kind exchange (one building for another) and Leker received boot along with the like-kind property, he will recognize gain to the extent of the lesser of the realized gain or the value of boot received. In this case, however, Leker does not have a realized gain. Thus, no gain is recognized. The basis in the new building (the like-kind property) will be the basis of the property transferred ($200,000), minus the amount of boot received ($30,000), or $170,000. CH13

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?

$2,000 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). CH13

On August 1 of the current year, Graham purchased and placed into service an office building costing $264,000, including $30,000 for the land. What was Graham's MACRS deduction for the office building in the current year?

$2,250 SUBTRACT LAND first Under MACRS, an office building is nonresidential real estate having a 39-year recovery period and is depreciated using the straight-line depreciation method. The land is not depreciable. The cost of the office building ($234,000) is divided by 39 years to yield $6,000. Because of the mid-month convention, 4.5 months of depreciation, or $2,250, is deductible in the year of purchase. CH13

Mr. Baker sold his home on November 1, Year 15 (the current year) for $355,000. He owned and lived in the home for 15 years, and it had an adjusted basis of $75,000. He purchased a new home for $200,000. What amount of gain may Mr. Baker exclude on this transaction?

$250,000 Mr. Baker will realize a $280,000 ($355,000 - $75,000) gain on the sale of the home. Mr. Baker is allowed to exclude up to $250,000 of gain on this sale. Therefore, he recognizes a gain of $30,000 CH13

Winkler, a CPA, provided accounting services to a client, Thompson. On December 15 of the same year, Thompson gave Winkler 100 shares of Foster Corp. as compensation for services. The adjusted basis of the stock was $4,000, and its fair market value at the time of transfer was $5,000. The following year, Winkler sold the stock on February 15 for $7,500. What is the amount that Winkler should recognize as gain on the sale of stock?

$2,500 The FMV of property received in exchange for services is income to the provider when it is not subject to a substantial risk of forfeiture and not restricted as to transfer. The property acquired has a tax cost basis equal to the FMV of the property. Therefore, Winkler's basis in the stock is $5,000. When he sold the stock 2 months later, Winkler realized gain of $2,500 ($7,500 sales price - $5,000 basis), and since all realized gains must be recognized unless the IRC expressly provides otherwise, Winkler will have recognized gain of $2,500. ch14

Upon her grandfather's death, Jordan inherited 10 shares of Universal Corp. stock that had a fair market value of $5,000. Her grandfather acquired the shares in 1996 for $2,500. Four months after her grandfather's death, Jordan sold all her shares of Universal for $7,500. What was Jordan's recognized gain in the year of sale?

$2,500 long-term capital gain. The basis of inherited property is the FMV on the date of death, so Jordan's basis in the shares of Universal stock is $5,000. Therefore, Jordan recognizes a gain of $2,500 ($7,500 sales price - $5,000 basis). Since sales of inherited property are automatically long-term gains (losses), Jordan recognizes a $2,500 long-term capital gain. ch14

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?

$20,000 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). CH14

Superior Construction Co. was contracted to plaster all the buildings of a historical preservation project for $2,500,000 over the next 2 years. Total estimated costs to complete are $2,000,000. Actual costs incurred in Years 1 and 2 were $800,000 and $900,000, respectively. Using the percentage-of-completion method, what amount of gross profit would Superior report in Year 1?

$200,000 Actual Costs yr1 / Total Estimated Costs = GP% (GP% x Cost of Project) - Actual Yr1 Costs Under the percentage-of-completion method, Superior calculates gross profit based on the ratio of costs for the tax year to total expected costs to complete the project. The ratio of costs is 40% ($800,000 actual costs ÷ $2,000,000 total costs to complete). The cost ratio is multiplied by the total contract for Year 1 gross receipts of $1,000,000 ($2,500,000 contract price × 40%). Year 1 gross receipts less Year 1 actual costs equals total gross profit for Year 1 of $200,000 ($1,000,000 - $800,000). ch16

During the current year, a corporation retired obsolete equipment purchased ten years ago having an adjusted basis of $30,000 and sold it as scrap for $1,000. The corporation also had $50,000 taxable income from operations. The taxable income of the corporation was

$21,000. DEDUCT ENTIRE REALIZED LOSS FROM OBSOLETE EQUIP The corporation realized a loss of $29,000 ($1,000 realized - $30,000 adjusted basis) on the sale of the retired equipment for scrap. This is a Sec. 1231 loss. Since there are no other Sec. 1231 gains or losses to net, it is treated as an ordinary loss. Taxable income is Taxable income from operations $50,000 Less: Loss on equipment (29,000) Taxable income $21,000 CH14

In January Year 1, Joan Hill bought one share of Orban Corp. stock for $300. On March 1, Year 3, Orban distributed one share of preferred stock for each share of common stock held. This distribution was nontaxable. On March 1, Year 3, Joan's one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. After the distribution of the preferred stock, Joan's bases for her Orban stocks are Common Preferred

$225 $75 Since the preferred stock dividend was nontaxable, the original basis of the common stock is allocated between the common stock and the preferred stock based on the relative fair market value of each on the date of the stock dividend. Joan's tax basis in the common stock after the receipt of the dividend is ($450 ÷ $600) × $300 = $225. Joan's tax basis in the preferred stock is ($150 ÷ $600) × $300 = $75. CH13

On October 1, 2020, 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 2020?

$25,000 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. CH13

In the current year, Christian received a gift of property from his mother that had a fair market value of $60,000. Her adjusted basis was $20,000. She paid a gift tax of $9,000. What is Christian's basis in the property?

$28,000 The 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 8,000 = $28,000 Gift Tax = (FMV - Basis) / (FMV - 15K limit) x Gift Tax paid Gift Tax = ((60,000 - 20,000) / (60,000 - 15,000) ) x 9,000 = 8,000 CH13

John owned a printing business and sold the following assets in Year 2: Printing press: Sales price $25,000 Original cost 20,000 Allowed or allowable depreciation 8,000 Computer equipment: Sales price $30,000 Original cost 28,000 Allowed or allowable depreciation 14,000 John had a net Sec. 1231 loss of $6,000 in Year 1. What is the amount and character of John's gain for Year 2?

$28,000 ordinary income; $1,000 capital gain. Section 1231 property is depreciable or real property used in a trade or business and held for more than 1 year or an involuntarily converted nonpersonal capital asset (i.e., held in connection with a trade or business or a transaction entered into for profit) held for more than 1 year. A taxpayer who has a net Sec. 1231 gain (i.e., excess of Sec. 1231 gains over Sec. 1231 losses) for the tax year must review the 5 most recent preceding tax years for possible recapture of net Sec. 1231 losses for such years. If there were any net Sec. 1231 losses during such period, the taxpayer must treat the current year's net Sec. 1231 gain as ordinary income to the extent of the amount of unrecaptured net Sec. 1231 losses for that past period [Sec. 1231(c)]. The losses are to be recaptured on a first-in, first-out (FIFO) basis. John realizes a total gain of $29,000. Since the assets also qualify as Sec. 1245 property, this Sec. 1231 gain is recharacterized as ordinary income to the extent of depreciation recaptured ($22,000) and to the extent of any unaccounted for Sec. 1231 loss ($6,000). The remaining $1,000 is recognized as a Sec. 1231 gain. ch14

Joe Hall owns a limousine for use in his personal service business of transporting passengers to airports. The limousine's adjusted basis is $40,000. In addition, Hall owns his personal residence and furnishings, which together cost him $280,000. Hall's capital assets amount to

$280,000 Capital assets include all property held by a taxpayer unless excluded by the IRC, such as property used in a trade or business. Personal-use property, such as a residence, is a capital asset. CH14

Lobster, Inc., incurs the following losses on disposition of long-term business assets during the year:Loss on the abandonment of office equipment$ 25,000 Loss on the sale of a building (straight-linedepreciation taken in prior years of $200,000) 250,000 Loss on the sale of delivery trucks15,000 What is the amount and character of the losses to be reported on Lobster's tax return?

$290,000 Sec. 1231 loss. Sec. 1231 property is property held for more than 1 year and includes all real or depreciable property used in a trade or business and involuntarily converted capital assets held in connection with a trade or business. All of the assets listed in this problem are Sec. 1231 assets; therefore, all of the losses ($290,000) are Sec. 1231 losses. ch14

Bob and Gloria sold securities in Year 1. The sales resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. How much can they deduct on their joint Year 1 return?

$3,000 Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. ch14

Iris King bought a diamond necklace for her own use at a cost of $10,000 10 years ago. In the current year, when the fair market value was $12,000, Iris gave this necklace to her daughter, Ruth. No gift tax was due. If Ruth sells this diamond necklace in the current year for $13,000, Ruth's recognized gain will be

$3,000 The basis of property acquired by gift is usually the donor's adjusted basis, increased by any gift tax attributable to appreciation. Since no gift tax was paid, Ruth's sale produces gain of $3,000, all of which must be currently recognized. CH13

During the current year, Nancy had the following transactions: Short-term capital loss($2,400) Short-term capital gain2,000 Short-term capital loss carryover from 2 years ago (1,400) Long-term capital gain (15% basket) 3,800 Long-term capital loss (28% basket) (8,000) Nancy has $82,000 of ordinary income for the current year. What is the amount of her capital loss deduction in the current year, and what is the amount and character of her capital loss carryover? Deduction Carryover

$3,000 $3,000 long-term (28% basket) The deduction for any capital loss is the excess of capital losses over capital gains (Sec. 1211). The capital loss deduction, however, is limited to $3,000 in any year. Unused capital losses may be carried forward indefinitely. Short-term capital losses are considered first to determine the character of the carryover. In this case, there is an $1,800 short-term capital loss ($400 current-year net loss + $1,400 carryover from 2 years ago). Since there is a long-term loss in the 28% basket, both losses must be completely applied against the long-term gain in the 15% basket. The $1,800 short-term loss is applied first, leaving $2,000 of long-term gain in the 15% basket to offset $8,000 the long-term loss in the 28% basket. The $8,000 long-term loss in the 28% basket is offset by the $2,000 gain in the 15% basket, and $3,000 of the remaining $6,000 loss is taken as a deduction in the current year. The remaining $3,000 is a long-term loss carryover to the 28% basket. Long-term capital gain (15% basket)$ 3,800 Short-term capital loss(1,800) Gain to be offset by long-term capital loss (28% basket)$ 2,000 Long-term capital loss (28% basket)(8,000) total $(6,000) Capital loss deduction for the current year3,000 Capital loss carryover (28% basket)$(3,000) ch14

In December, Emily sold an antique rug for $4,100. She bought the rug 5 years ago for $1,100. What is her taxable gain and at what maximum rate will it be taxed?

$3,000 long-term capital gain, taxed at 28% rate. The sale of the antique rug qualifies as a sale of a collectible item. For individuals, capital transactions involving long-term holding periods are grouped by tax rates. A 28% rate is applied to gains or losses from the sale of collectible items. The amount of the gain is $3,000 ($4,100 FMV - $1,100 basis). ch14

John is a cash-basis taxpayer. He received the following items of income in December Year 3: 1. The loan on his truck was forgiven because he performed some accounting work for the dealer. He owed $2,000 at the time. 2. He received a retainer of $500 from a new client to guarantee that his services would be available in February when the client would need help preparing financial statements. 3. He finally received the $800 for work he completed in November of Year 1. How much of this income must John include on his Year 3 tax return?

$3,300 Gross income means all income from whatever source derived unless specifically excluded (Sec. 61). The taxpayer has gross income for providing services when the debt is canceled. Cash-basis taxpayers must report prepaid income when received. ch16

Mainstream Company purchased depreciable equipment in 2020 for $1,063,000 and claimed the maximum Sec. 179 deduction for that year of $1,040,000. The equipment qualified as 5-year property under MACRS. Mainstream sold all of this equipment on June 30, 2021. The depreciation rates for 5-year property for the first 2 years under MACRS, assuming 200%-declining-balance switching to straight-line, are 20% and 32%, respectively. What will the amount of Mainstream's MACRS deduction be for 2021?

$3,680 The deduction for MACRS depreciation is calculated using the 200%-declining-balance method for 5-year property. The basis is reduced by $1,040,000 (the Sec. 179 deduction for 2020). The half-year convention allows one-half year depreciation in the year of acquisition and one-half year depreciation in the year of disposition. Therefore, Mainstream's 2021 MACRS depreciation is $3,680. Cost of equipment$1,063,000 Less: Sec. 179 deduction(1,040,000) Depreciable basis$ 23,000 Times: MACRS percentage(5-year property, year 2)× .32 $ 7,360 Times one-half (half-year convention)× .50 2021 depreciation$ 3,680 The 2021 depreciation amount can also be determined by using the MACRS tables. CH13

Under the rules for long-term contracts, which of the following proposed projects may use the completed-contract method?

$35 million home construction project. Receipts and expenditures are accounted for, under the completed-contract method, in the tax year in which the contract is completed. The method is allowed only for a construction contract of a small business if expected to take no longer than 2 years to complete or home construction projects. A small business is one with average annual gross receipts not greater than $26 million for the 3 preceding tax years. Any non-housing project lasting 3 years does not qualify. Any non-housing project by a large business does not qualify. Only the home construction project qualifies for use of the completed-contract method. ch16

Mr. Pine purchased a small office building. Included in his costs were the following: Cash down payment $ 50,000 Mortgage on property assumed 300,000 Title insurance 2,000 Fire insurance premiums 2,000 Attorney fees 1,000 Rent to former owner to allow Mr. Pine to occupy the office building prior to closing 4,000 What is Mr. Pine's basis in the property?

$353,000 NO FIRE INSURANCE PREMIUMS NO RENT The basis of property is its original cost. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Further, the cost of property includes necessary expenses paid in connection with the acquisition of the property. The attorney fees and title insurance are included in the cost of the property. The fire insurance premiums and rent expense, however, are not paid in connection with the acquisition of the property. Thus, the basis is $353,000 ($50,000 cash payment + $300,000 mortgage assumed + $2,000 title insurance + $1,000 attorney fees). CH13

Aviary Corp. sold a building for $600,000. Aviary received a down payment of $120,000, as well as annual principal payments of $120,000 for each of the subsequent 4 years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method?

$36,000 INSTALLMENT METHOD: SP - (Basis - depreciation) = GP GP% = GP/SP GP% x Down Payment Under the installment method, the gain recognized is equal to the proceeds received in the current year multiplied by the gross profit percentage. The gross profit percentage is the gross profit divided by the sales price. The gross profit of $180,000 is the sales price less the AB. The AB of the asset is the $500,000 initial cost reduced by the $80,000 depreciation, or $420,000. Thus, the gross profit percentage is equal to 30% ($180,000 gross profit ÷ $600,000 sales price). The only installment received this period is the down payment of $120,000, which is multiplied by the gross profit percentage (30%) for a reported gain of $36,000 currently. The building is 1250 property and would have been depreciated over S/L, therefore there is no depreciation recaptured as ordinary income (i.e., all $80,000 depreciation is unrecaptured) and the reported gain is not increased to $80,000. ch16

Mr. and Mrs. Jones sold their principal residence for $750,000. They had lived in their residence for 20 years, and it had an adjusted basis of $210,000. The Joneses have decided not to purchase a new home and will instead rent a condominium on the beach. What amount of gain must they recognize on this transaction?

$40,000 Mr. and Mrs. Jones will realize a $540,000 ($750,000 sales price - $210,000 adjusted basis) gain on the sale of the residence. An exclusion of up to $500,000 is allowed for married taxpayers filing jointly on the sale of a principal residence. Therefore, the Joneses' recognized gain is $40,000 ($540,000 realized gain - $500,000 exclusion). CH13

Mr. Wolf purchased a building in Year 1 to use in his business. The purchase price was $400,000. He paid $100,000 cash and took out a mortgage of $300,000. In Year 11, he made certain permanent improvements to the building at a cost of $80,000. In Year 20, Mr. Wolf sold the building for $600,000 in cash and relief from the remaining mortgage balance of $100,000. By the time of sale, Mr. Wolf had repaid a total of $200,000 principal on the original $300,000 mortgage and had deducted $180,000 total depreciation on the original cost and improvements. What is Mr. Wolf's realized gain on the sale?

$400,000 The amount of the realized gain is the amount realized less the adjusted basis. Mr. Wolf realized $700,000 ($600,000 cash + $100,000 debt relief) from the sale of the building. His basis in the building was $300,000 ($400,000 purchase price + $80,000 capital improvements - $180,000 depreciation). His realized gain is therefore $400,000 ($700,000 amount realized - $300,000 adjusted basis). CH14

In the current year, Vinton exchanged unimproved land for an apartment building. The land had a basis of $300,000, and a fair market value (FMV), of $420,000, and was encumbered by a $100,000 mortgage. The apartment building had a FMV of $550,000 and was encumbered by a $230,000 mortgage. Each party assumed the other's mortgage. What is Vinton's basis in the apartment building?

$430,000 Qualified property received in a like-kind exchange has an exchanged basis adjusted for boot and gain recognized. Adjusted basis of property given +Gain recognized +Boot given (cash, liability incurred, other property) -Boot received (cash, liability relief, other property) =Basis in acquired property Vinton has a net boot given (liability incurred) of $130,000 [$230,000 assumed - $100,000 discharged]. In this exchange, Vinton realized a gain of $120,000 ($550,000 FMV of property received - $300,000 adjusted basis given up - $130,000 net liability assumed). Recognized gain is the lesser of the realized gain of $120,000 or boot received of 0. Thus, recognized gain is 0. The adjusted basis of the apartment building received is $430,000 ($300,000 adjusted basis of property given + 0 recognized gain + $230,000 boot given - $100,000 boot received). The basis of the property received can also be calculated as the excess of the FMV of the property received ($550,000) over the realized gain unrecognized ($120,000). CH13

U Co. had cash purchases and payments on account during the current year totaling $455,000. U's beginning and ending accounts payable balances for the year were $64,000 and $50,000, respectively. What amount represents U's accrual basis purchases for the year?

$441,000 Cash purchases and payments - (yr1 AP Balance - yr2 AP Balance) The cash purchases and payments on account during the current year represent all purchases during the current year plus any payments to the existing balance of accounts payable. The question only asks for the purchases during the current year; therefore, the current payments of $455,000 are reduced by the $14,000 reduction in the AP balance ($64,000 beginning - $50,000 ending) to arrive at the current year purchases of $441,000. ch16

Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, Year 4. On January 2, Year 1, Mott paid $30,000 as consideration for canceling the lease. On November 1, Year 1, Nare leased the building to Pine under a 5-year lease. Pine paid Nare $10,000 rent for the 2 months of November and December, and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its Year 1 income tax return?

$45,000 Both cash- and accrual-basis taxpayers must include amounts in gross income upon actual or constructive receipt if the taxpayer has an unrestricted claim to such amounts. Since Nare has an unrestricted claim to the $5,000 of rent paid in advance, it is included in his rental income. The amounts received by a lessee to cancel a lease are treated as an amount realized on a disposition of property. However, value received by a lessor to cancel a lease is gross income from rent as if received in lieu of rent. ch16

On January 2, Year 1, Bates Corp. purchased and placed into service 7-year MACRS tangible property costing $100,000. On December 31, Year 3, Bates sold the property for $102,000, after having taken $47,525 in MACRS depreciation deductions. What amount of the gain should Bates recapture as ordinary income?

$47,525 Depreciable tangible property used in a trade or business is Sec. 1245 property. Section 1245 states that gain realized on the disposition of this property is recaptured as ordinary income to the extent of the lesser of depreciation taken or realized gain. ch14

Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of stock Greller sold?

$5,000 .A stock split is not a distribution. The basis in the old stock is "split" and allocated to the new stock. Consequently, the basis in the new stock is $50 per share ($10,000 ÷ 200 shares). Therefore, the total basis in sold shares is $5,000 (100 shares × $50). CH13

Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Boone gave 100 shares of the stock to another of Carter's relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share. What was Dixon's basis in the 100 shares of stock when acquired on June 1?

$5,000 Inherited and gifted property are differentially treated from each other. Property received by inheritance (bequeathed) has a basis equal to the FMV on the date of death or 6 months after if the executor elects the alternate valuation date for the estate tax return. Boone's basis in the stock initially received is $100 per share (the FMV at time of death). The 2 for 1 stock split reduced the per share basis from $100 to $50 ($100 per share ÷ 2 shares). The donee's (Dixon's) basis in property acquired by gift is the donor's (Boone's) basis; therefore, Dixon's total basis in the 100 shares of stock acquired on June 1 is $5,000 [$50 per share (Boone's per share basis) × 100 shares]. CH13

In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next 5 years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale?

$5,000 Under the installment sales method, current-year installment income equals current-year receipts multiplied by the gross profit percentage. The gross profit percentage is the gross profit divided by the sales price. The gross profit of $20,000 is the sales prices less the AB of the land. Thus, the gross profit percentage is equal to 20% ($20,000 gross profit ÷ $100,000 sales price). The only receipt this period is the down payment of $25,000, which is multiplied by the gross profit percentage (20%) for a reported gain of $5,000 currently. ch16

Joan Reed exchanged commercial real estate that she owned for other commercial real estate plus cash of $50,000. The following additional information pertains to this transaction: Property given up by Reed Fair market value $500,000 Adjusted basis 300,000 Property received by Reed Fair market value 450,000 What amount of gain should be recognized in Reed's income tax return?

$50,000 Neither gain nor loss is recognized on an exchange of like-kind property held for productive use in a trade or business or for investment. When boot (cash) is received, gain or loss is recognized to the extent of the boot. Reed recognizes a $50,000 gain. CH13

In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, had a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a

$50,000 Section 1031 defers recognizing gain or loss to the extent that property productively used in a trade or business is exchanged for property of like-kind. "An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange." Therefore, the exchange of farmland for an office building qualifies for nonrecognition. Additionally, liabilities are not qualified property and are treated as money paid or received. Also, realized gain is usually recognized equal to the lesser of gain realized or boot received. The amount of Tatum's recognized gain is calculated as follows: FMV office building $350,000 Liabilities relieved 120,000 Amount realized $470,000 Less: AB farmland (250,000) Less: Liabilities assumed (70,000) Gain realized $150,000 Net boot received equals $50,000 ($120,000 liability relief - $70,000 liabilities assumed), and since Tatum recognizes the lesser of gain realized or boot received, Tatum recognizes $50,000 of gain. CH13

In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Sec. 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Sec. 1244 stock in MMM Corp., another qualifying small business corporation. What is the maximum amount of loss that Fitz can deduct for the current year?

$50,000 ordinary loss and $18,000 capital loss. Up to $50,000 of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss. This limit applies to Sec. 1244 stock held in all corporations. The remaining $18,000 ($48,000 + $20,000 - $50,000) is a capital loss. CH14

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?

$50,000 short term. 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. CH14

Mitchell sold his Saratoga Bombers Corporation stock to his brother Sheldon for $7,000. Mitchell's cost basis in the stock was $10,000. Sheldon later sold this stock to Sonia, an unrelated party, for $10,500. What is Sheldon's recognized gain?

$500 Losses are not allowed on sales or exchanges of property between related parties. Brothers are related parties. Mitchell realized a $3,000 ($10,000 - $7,000) loss on the sale but may not deduct it. On the subsequent sale, Sheldon realized a $3,500 gain ($10,500 sales price - $7,000 basis). However, he does recognize a gain of $500 ($3,500 - $3,000) because the disallowed loss is used to offset the subsequent gain on the sale of the property. CH13

Mr. McCarthy exchanged real estate that he held for investment purposes for other real estate that he will hold for investment purposes. The real estate that he gave up had an adjusted basis of $8,000. The real estate that he received in the exchange had a fair market value of $10,000, and he also received cash of $1,000. Mr. McCarthy paid $500 in exchange expenses. What is the amount of gain recognized by Mr. McCarthy?

$500 The basis of property acquired in a like-kind exchange is equal to the adjusted basis of property surrendered, decreased by any boot received and increased by any gain recognized or boot given [Sec. 1031(d)]. The gain recognized equals the lesser of the realized gain ($10,000 FMV of land + $1,000 boot received - $8,000 basis - $500 boot given) or the boot received ($1,000). The IRS has ruled that exchange expenses may be deducted in computing the amount of gain or loss realized, offset against cash payments received in determining gain to be recognized, or included in the basis of the property received (Rev. Ruling 72-456). The best action would be to offset the cash received. Therefore, Mr. McCarthy will recognize a $500 gain ($1,000 - $500). CH13

Kant, a cash-basis individual, owns and operates an office building. Kant received the following payments during the current year: Current rents$30,000 Advance rents for the next year10,000 Security deposits held in a segregated account5,000 Lease cancellation payments15,000 What amount is included in gross income?

$55,000 .Gross income includes $55,000 ($30,000 current rents + $10,000 advance rents + $15,000 lease cancellations). Current rents, advance rents for the next year, and lease cancellation payments are all included in gross income. Prepaid rent is income when received, even under the accrual method of accounting, as long as there are no restrictions on the use of such payments. Lease cancellation payments are payments made in lieu of rent and are therefore included in gross income. ch16

Starr, a self-employed individual, purchased a piece of equipment for use in Starr's business. The costs associated with the acquisition of the equipment were: Purchase price $55,000 Delivery charges 725 Installation fees 300 Sales tax 3,400 What is the depreciable basis of the equipment?

$59,425 Initial basis in purchased property is the cost of acquiring it, which includes (1) stated purchase price, (2) closing costs (e.g., brokerage commissions, pre-purchase taxes, sales tax on purchase, title transfer taxes, title insurance, recording fees, attorney fees, document review and preparation), and (3) miscellaneous costs (e.g., appraisal fees, freight, installation, testing). Starr's depreciable basis of the equipment is $59,425 [$55,000 purchase price + $725 delivery charges (miscellaneous costs) + $300 installation fees (miscellaneous costs) + $3,400 sales tax (closing cost)]. CH13

Ace Rentals, Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its Year 2 and Year 1 balance sheets, respectively. During Year 2, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace's Year 2 corporate income tax return, what amount should Ace include as rent revenue?

$65,000 Rent Payments + Nonrefundable rent deposits + (Yr2 -Yr1 Balance) Under the accrual method of accounting, income is included in gross income when all the events have occurred that fix the right to receive such income, and the amount thereof can be determined with reasonable accuracy. The $50,000 is included, as is the $5,000 deposit, since it is nonrefundable. The increase in rent receivable ($10,000) is also included. Thus, total rent revenue is $65,000. ch16

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?

$7,000 Section 1245 property is depreciable personal property held for greater than 1 year and used in a trade or business (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. If the net result of all Sec. 1231 gains and losses is a gain, the gain is taxed as a long-term capital gain. The realized gain of $27,700 is greater than the depreciation taken ($20,700) by $7,000. All Sec. 1245 and 1231 property is long term. ch14

In 2008, Danielson invested $2,000,000 in DEC, a qualified small business corporation. Six years later, Danielson sold all of the DEC stock for $16,000,000 and purchased an office building with the proceeds. Danielson had not previously excluded any gain on the sale of small business stock. What is Danielson's taxable gain after the exclusion?

$7,000,000 Taxpayers may exclude 50% (or more, depending on when the stock was acquired) of the gain from the sale or exchange of small business stock if the stock was held for more than 5 years. Danielson has realized gain of $14,000,000 ($16,000,000 sales price - $2,000,000 AB), but only needs to recognize $7,000,000 (50% × $14,000,000) as a taxable gain. CH14

Dawson, Inc.'s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. What is Dawson's basis in the new warehouse?

$75,000 If the company receives an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property, the company will have a gain. The gain is the amount received minus the adjusted basis in the property. The company will probably be able to defer the gain to a later year (or perhaps indefinitely) if it purchases qualified replacement property. The basis of the replacement property will be the cost of the replacement property decreased by the unrecognized gain. Unrecognized gain equals $120,000 total gain minus $28,000 recognized gain, which is $92,000. Therefore, the basis in the new warehouse is equal to the $167,000 cost of the replacement property minus $92,000 unrecognized gain, which is $75,000. CH13

Sal used a building in his business that cost $200,000. In September Year 1, Sal sold the building to Benno for $100,000 cash. Benno also agreed to assume Sal's $150,000 mortgage and pay Sal's $5,000 accrued real estate taxes. The total depreciation claimed on the building (including Year 1 depreciation) was $30,000. Sal paid $10,000 selling expenses on the sale. What was Sal's realized gain or loss on the sale of the building?

$75,000 gain. Cash - (Cost - Depr) + Mortgage + Accrued Expenses - Selling Costs The gain from a sale or exchange of property is the excess of the amount realized from the sale or exchange over the property's adjusted basis. The adjusted basis of an asset is generally its original cost plus the cost of any capital improvements to the property and less any depreciation or depletion. The amount realized on a sale or exchange is the total services received. The amount realized also includes any liabilities that are assumed by the buyer and liabilities to which the property traded is subject. The amount realized is the sales price less any selling expenses. Sal's gain is calculated as follows: Sales price$255,000 Less: Selling expenses(10,000) Amount realized$245,000 Less: Adjusted basis ($200,000 - $30,000)(170,000) Realized gain$ 75,000 ch14

On August 1 of the current year, Roger Company sold machinery used in its business for a total price of $20,000, payable in four equal annual installments of principal plus interest at 10%. The first payment was due and paid on December 31 of the current year. At the time of the sale, Roger had a $4,000 basis in the machinery and $8,000 Sec. 1245 depreciation recapture potential. There were no other Sec. 1231 transactions, and Roger Company had no unrecaptured Sec. 1231 losses from prior years. Ignoring the interest income, what amount must Roger recognize in the current year?

$8,000 ordinary income and $2,000 capital gain. SP 20,000 -Basis (4,000) =Total Gain 16,000 8000 of which is ordinary inc (depreciation 1245) ? is capital 1231 Basis + Depreciation = New basis 4,000 + 8,000 = 12,000 SP: 20,000 -New Basis (12,000) = GP: 8,000 GP % = GP/SP 40% = 8,000 / 20,000 ? Capital = (20,000 / 4 periods) x 40% GP% = 2,000 Section 453(i) requires full recognition of depreciation recapture in the year of sale regardless of payments. Any amounts treated as ordinary income by reason of the recapture provisions are added to the basis of the property for determining gain or loss. The total gain is $16,000 ($20,000 selling price - $4,000 basis). Therefore, Roger must recognize the full $8,000 of Sec. 1245 depreciation recapture as ordinary income in the current year. This amount is added to the basis for determining the remaining installment gain or loss. The revised gain is thus $8,000 ($20,000 selling price - $12,000 adjusted basis). The gross profit percentage is 40% ($8,000 gross profit ÷ $20,000 contract price). This percentage will be applied to each of the four equal annual payments to determine the amount of Sec. 1231 capital gain for each year. For the current year, the capital gain is $2,000 [($20,000 ÷ 4) × 40%]. If Roger Company had any unrecaptured Sec. 1231 losses in the 5 prior years, this gain would be ordinary to the extent of those losses. ch16

David sells depreciable real property held for more than 12 months in Year 1. It is his only capital transaction for the year, and he has no capital loss carryovers to Year 1. He has a net capital gain of $100,000 from the sale, $80,000 of which is attributed to prior depreciation deductions not recaptured as ordinary income. David has $175,000 of ordinary income. What is(are) the appropriate basket(s) for the net capital gain in Year 1?

$80,000 - 25% basket, $20,000 - 15% basket. The 25% rate basket consists of unrecaptured Sec. 1250 gain. (There are no losses in this basket.) Unrecaptured Sec. 1250 gain is long-term capital gain, not otherwise recaptured as ordinary income, attributed to prior depreciation of real property and is from property held for more than 12 months. Accordingly, the $80,000 gain due to prior depreciation deductions is properly contained in the 25% rate basket. Since David has $175,000 of ordinary income and the property was held over 12 months, the remaining $20,000 gain belongs in the 15% breakpoint basket. ch14

Ms. Willow operated a small manufacturing plant. She took delivery on a new plastic mold stamping machine. Her costs included the following: Cost of machine $88,000 Sales tax 4,000 Freight charges to deliver property to her 1,500 Excise taxes 2,000 What is Ms. Willow's basis in the machine?

$95,500 The basis of property is the cost of the property. Sales and excise taxes paid in connection with the acquisition of property are treated as a cost of the property. Delivery, installation, and freight charges are also included as part of the cost of the property. Basis is computed as follows:Purchase price$88,000Sales tax4,000Freight charges1,500Excise taxes2,000Basis in equipment$95,500 CH13

Al Oran bought a paved vacant lot adjacent to his retail store for use as a customers' parking lot at a cost of $15,000. In addition, Oran bought new store fixtures costing $8,000. What portion of these assets constitutes capital assets?

0 Capital assets are all property held by a taxpayer not excluded by IRC definition. Real property used in a trade or business is specifically excluded, as is depreciable business property such as the store fixtures. ch14

Melaney has had a bad year with her investments. She lent a friend $8,000; the friend did not repay the loan when it was due and then declared bankruptcy. The loan is totally uncollectible. Melaney also was notified by her broker that the Oak corporate bonds she owned became worthless on December 31, 2020. She had purchased the bonds for $22,000 on November 10, 2019. Melaney also had a $60,000 loss on the disposition of § 1244 corporate stock that she purchased several years ago. Melaney is single. A) What are the nature and amount of Melaney's losses? Property 1. Uncollectible loan to friend 2.Worthless Oak corporate bonds 3.Loss on § 1244 corporate stock B) What is Melaney's AGI for 2020 assuming that she has $65,000 of ordinary gross income from sources other than those discussed? c. What are the nature and amount of Melaney's loss carryforwards? She has _______ in short-term capital loss carryforward and __________ in long-term capital loss carryforward.

1. Short-term capital loss; $8,000. When Melaney made the loan to a friend, she had a nonbusiness receivable. When the loan is not repaid, she has a $8,000 nonbusiness bad debt assuming the debt is a bona-fide debt. The $8,000 is treated as a short-term capital loss, no matter how long Melaney held the loan. Whether the receivable was a capital asset and whether its holding period was long or short term are not relevant because the Code defines the loss as a short-term capital loss. 2. Long-term capital loss; $22,000. Melaney also is the holder of a worthless bond. The bond is deemed to have become worthless on the last day of 2020—the year in which it became worthless. Melaney's holding period for the bond is long-term because the time period from November 10, 2019, through December 31, 2020, is more than one year. The $22,000 loss on the bond is a long-term capital loss. 3. Part ordinary loss and part capital loss; $60,000. The $60,000 loss on the § 1244 stock is a $50,000 ordinary loss deductible for AGI ($50,000 is the annual maximum for an unmarried taxpayer) and a $10,000 long-term capital loss. B) Answer: $12,000. All taxpayers net their capital gains and losses. Short-term gains and losses (if any) are netted against one another, and long-term gains and losses (if any) are netted against one another. The results will be net short-term gain or loss and net long term gain or loss. If these two net positions are of opposite sign (one is a gain and one is a loss), they are netted against each other. Treatment as an ordinary loss generally is preferable to capital loss treatment because ordinary losses are deductible in full while the deductibility of capital losses is subject to certain limitations. An individual taxpayer may deduct a maximum of $3,000 of net capital losses for a taxable year. Excess loss over the annual limit carries over and may be deductible in a future tax year. Melaney's adjusted gross income is $12,000 [$65,000 - $3,000 (capital loss deduction) - $50,000 (§ 1244 ordinary loss deduction)]. C) Answers: $5,000; $32,000. A short-term capital loss carryover to the current year retains its character as short-term and is combined with the short-term items of the current year. A long-term net capital loss carries over as a long-term capital loss and is combined with the current-year long-term items. The long-term loss carryover is first offset with 28% gain of the current year, then 25% gain, and then 0%/15% gain until it is absorbed. Since short-term capital losses are used first to make up the capital loss deduction, Melaney has a $5,000 ($8,000 - $3,000) short-term capital loss carryforward and a $32,000 long-term capital loss carryforward. CH14

The holding period for determining long-term capital gains and losses is more than

12 months. Under Sec. 1222, capital assets must be held for more than 1 year in order for the gain or loss on sale or exchange to be treated as long-term. ch14

On January 3 of the current year, Wilson purchased 300 shares of common stock in Corporation Why for $120 per share. Four months later, he purchased 100 additional shares at $180 per share. On December 10 of the current year, Wilson received a 10% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Wilson's basis in each share of stock of Corporation Why stock after the stock dividend?

330 shares at $109 a share and 110 shares at $164 a share. The stock dividend made by Corporation Why is a tax-free distribution. The basis of the new stock is determined by allocating the basis of the old stock between the new stock and the old stock. This allocation of basis in the stock is made based on the relative fair market values on the date of distribution for each of the two different blocks of stock, rather than by averaging them. Wilson owns 330 (300 + 30) shares with a basis of $36,000, or $109 per share and 110 (100 + 10) shares with a basis of $18,000, or $164 per share. CH13

In the current year, which taxable year may a newly formed partnership not adopt without obtaining prior approval from the IRS?

A January 31 year end if it is a retail enterprise with a natural business year ending January 31 and all of its majority and principal partners are on a calendar year. A partnership's required taxable year is that of the partner(s) owning more than 50% of partnership capital and profits if they have the same tax year on the first day of the partnership's tax year. If the majority partner(s) do not have the same taxable year or have not kept their same tax year for the required period, the taxable year of all principal (5%) partners must be adopted. If all principal partners do not have the same taxable year, the least aggregate deferral year end must be used. A newly formed partnership may elect a fiscal year with no more than a 3-month deferral period (i.e., the number of months between the beginning of the tax year selected and the end of the required tax year). A January 31 year end has an 11-month deferral period. Any other fiscal year may be chosen only with the consent of the IRS and only if a business purpose (e.g., natural business year) is established. ch16

On March 10, Year 6, James Rogers sold 300 shares of Red Company common stock for $4,200. Rogers had acquired the stock in Year 1 at a cost of $5,000. On April 4, Year 6, he repurchased 300 shares of Red Company common stock for $3,600 and held them until July 18, Year 6, when he sold them for $6,000. How should Rogers report the above transactions for Year 6?

A long-term capital gain of $1,600. The sale of stock on March 10 was a wash sale because identical stock was repurchased within 30 days. The $800 loss realized in March will not be recognized for tax purposes. The disallowed loss is added to the basis of the stock that is subsequently purchased in April. The basis in the stock purchased in April is $4,400 ($3,600 cost + $800 disallowed loss), and a gain of $1,600 is recognized when the stock is sold for $6,000 on July 18. The gain is long-term because the holding period of stock acquired in a wash sale includes the holding period of the originally purchased stock. ch14

Which of the following taxpayers may use the cash method of accounting?

A qualified personal service corporation. The cash method of accounting is only permitted for certain taxpayers. The following taxpayers use the accrual method of accounting as their overall method of accounting for tax purposes: (1) C corporations, unless they are small C corporations or personal service corporations; (2) partnerships that have a C corporation as a partner; (3) trusts that are subject to the tax on unrelated income; and (4) tax shelters. Any entity that is not a tax shelter and has average gross receipts of not more than $26 million may also use the cash method of accounting, i.e., small C corporations. An entity meets the $26 million gross receipts test if the annual gross receipts for the 3 tax years ending with the prior tax year do not exceed $26 million. Taxpayers that are required to use inventories must use the accrual method to account for purchases and sales. ch16

Tom Howard and Frank Pérez are good friends (and former college roommates). Each owns investment property in the other's hometown (Tom lives in Kalamazoo, MI; Frank lives in Austin, TX). To make their lives easier, they decide to exchange the investment properties. Under the terms of the exchange, Frank will transfer realty (20 acres of unimproved land; adjusted basis of $52,000; fair market value of $80,000) and Tom will exchange realty (25 acres of unimproved land; adjusted basis of $60,000; fair market value of $92,000). Tom's property is subject to a mortgage of $12,000 that will be assumed by Frank. If an amount is zero, enter "0". a. What are Frank's and Tom's recognized gains?Frank's recognized gain is ___________, and Tom's recognized gain is __________ b. What are their adjusted bases?Frank's adjusted basis is __________, and Tom's adjusted basis is _____________.

A. Answers: $0; $12,000. The exchange qualifies as a like-kind exchange for both Tom and Frank. The receipt of boot will trigger recognition of gain if there is realized gain. Frank Tom Amount realized $92,000 $92,000(2) Less: adjusted basis(64,000)(1)(60,000) Equals: realized gain$28,000 $32,000 Less: recognized gain$0 $12,000(3) Equals: balance to be postponed $28,000 $20,000 (1) Frank's adjusted basis of $64,000 consists of the $52,000 adjusted basis for the property he transferred increased by the $12,000 mortgage he assumed (boot given) on the property received from Tom. (2) Tom's amount realized of $92,000 consists of the $80,000 fair market value of the property received increased by his $12,000 mortgage assumed by Frank (boot received by Tom). (3) The receipt of boot triggers the recognition of gain. The amount of the recognized gain is the lesser of the boot received or the realized gain (realized gain serves as the ceiling on recognition). The $12,000 boot received by Tom triggers the recognition of $12,000 of Tom's realized gain. b. Answers: $64,000; $60,000. If an exchange does not qualify as nontaxable under § 1031, gain or loss is recognized and the basis of property received in the exchange is the property's fair market value. If the exchange qualifies for nonrecognition, the basis of property received must be adjusted to reflect any postponed (deferred) gain or loss. The basis of like-kind property received in the exchange is the property's fair market value less postponed gain or plus postponed loss. Frank Tom Fair market value$92,000$80,000 Less: postponed gain(28,000) (20,000) Adjusted basis$64,000 $60,000 CH13

Which of the following items is a capital asset?

An automobile for personal use. All property is characterized as a capital asset, unless expressly excluded. The IRC specifically excludes depreciable business property, accounts receivable for inventory sold, and real property used in a trade or business. ch14

Diana acquires and places in service a 5-year class asset, costing $65,000, on December 19, 2020. Diana does not elect immediate expensing under § 179. She elects additional first-year depreciation. Click here to access the depreciation table to use for this problem. Diana's total cost recovery deduction for the asset is ________ for 2020.

Answer: $65,000. The TCJA of 2017 allows taxpayers to deduct 100 percent cost recovery in the year qualified property is placed in service. The term qualified property includes most depreciable assets other than buildings with a recovery period of 20 years or less. For property placed in service after September 27, 2019, bonus depreciation applies to both new and used property (prior law restricted bonus depreciation to new property). The additional first-year depreciation is taken in the year in which the qualifying property is placed in service. After the additional first-year depreciation is calculated, the standard MACRS cost recovery allowance is calculated by multiplying the cost recovery basis (original cost recovery basis less additional first-year depreciation) by the percentage that reflects the applicable cost recovery method and convention. Congress added the mid-quarter convention that applies if more than 40 percent of the value of property other than eligible real estate is placed in service during the last quarter of the year. Since the asset was purchased during the last quarter, mid quarter applies. Diana's deduction is computed as follows:100% additional first-year depreciation: ($65,000 × 100%) = $65,000. Since the cost of the asset is reduced by the additional depreciation, there is no remaining depreciable balance left for MACRS depreciation ($65,000 - $65,000). CH13

On October 1, 2020, Priscilla purchased a business. Of the purchase price, $60,000 is allocated to a patent and $375,000 to goodwill. If required, round your answer to the nearest dollar. The 2020 § 197 amortization deduction is __________

Answer: $7,250. Purchase price of intangible assets / 15 years x (Months/12) Taxpayers can claim an amortization deduction on intangible assets called "amortizable § 197 intangibles." The amount of the deduction is determined by amortizing the adjusted basis of such intangibles ratably over a 15-year period beginning in the month in which the intangible is acquired. An amortizable § 197 intangible is any § 197 intangible acquired after August 10, 1993, and held in connection with the conduct of a trade or business or for the production of income. Section 197 intangibles include goodwill and going-concern value, franchises, trademarks, and trade names. Covenants not to compete, copyrights, and patents also are included if they are acquired in connection with the acquisition of a business. Generally, self-created intangibles are not § 197 intangibles. The 15-year amortization period applies regardless of the actual useful life of an amortizable § 197 intangible. No other depreciation or amortization deduction is permitted with respect to any amortizable § 197 intangible except those permitted under the 15-year amortization rules. The 2020 § 197 amortization deduction of $7,250 ($1,000 + $6,250) is computed as follows: Patent: $60,000 /15 years = $4,000 x 3/12 = $1,000. Goodwill: $375,000 /15 years = $25,000 x 3/12 = $6,250. CH13

Paul has the following long-term capital gains and losses for 2020: $62,000 28% gain, $21,000 28% loss, $18,000 25% gain, and $64,000 0%/15%/20% gain. He also has a $53,000 short-term loss and a $5,000 short-term gain. He has no other income. a. What is Paul's AGI from these transactions? Paul's AGI is __________ b. If he has a net long-term capital gain, what is its makeup in terms of the alternative tax rates? Paul's net long-term capital gain is made up of a __________ 25% gain, and a ___________ 0%/15%/20% gain in terms of the alternative tax rates.

Answers: $75,000; $11,000; $64,000. a. Paul has AGI of $75,000. Since Paul has no other income, his AGI is comprised of $11,000 25% gain and $64,000 0%/15%/20% gain. b. The $62,000 28% gain is netted against the $21,000 28% loss for a net of $41,000 28% gain. The net $48,000 ($5,000 - $53,000) short-term capital loss is first offset against the net $41,000 28% gain, reducing it to zero. The remaining $7,000 of STCL next offsets $7,000 of the $18,000 25% gain, reducing it to $11,000. The $75,000 net LTCG is made up of the $11,000 25% gain and the $64,000 0%/15%/20% gain. CH14

Asok's AGI for 2020 is $133,250. Included in this AGI is a $45,000 25% long-term capital gain and a $13,000 0%/15%/20% long-term capital gain. Asok is single and uses the standard deduction. Compute his taxable income, the tax liability, and the tax savings from the alternative tax on net capital gain. Asok's taxable income: __________ His regular tax liability: ________ • His tax liability using the alternative tax approach: ___________ The tax savings from using the alternative tax approach: __________

Answers: $120,850; $23,084; $21,914; $1,170. Total Taxable Income = AGI - Standard Deduction CH14

In 2020, Skylar sold an apartment building for $20,000 cash and a $300,000 note due in two years. Skylar's cost of the property was $250,000, and he had deducted depreciation of $150,000, $60,000 of which was in excess of what the straight-line amount would have been. a. Under the installment sales method, what is Skylar's total realized gain? SP -(Basis - depreciation total) + Cash b. In 2020, how much § 1250 gain does Skylar recognize? EXCESS How much § 1231 gain does he recognize? 220 gain -60 depr =160 gain remaining 160 / 300 contract price = .5 .5 x 20,000 cash payment = 10,000

Answers: $220,000; $60,000; $10,000. The installment method applies to gains (but not losses) from the sale of property by a taxpayer who will receive at least one payment after the year of sale. The gain reported on each sale is computed using the following formula:(Total gain/Contract price) x Payments received during the tax year = Gain recognized in the tax year. Total gain is the selling price reduced by selling expenses and the adjusted basis of the property. The selling price is the total consideration received by the seller, including notes receivable from the buyer and the seller's liabilities assumed by the buyer. Contract price is the selling price less the seller's liabilities that are assumed by the buyer. Generally, the contract price is the amount, other than interest, the seller will receive from the purchaser. Payments received are the collections on the contract price received in each tax year. This generally is equal to the cash received less the interest income collected for the period. If the buyer pays any of the seller's expenses, the seller regards the amount paid as a payment received. Gains attributable to ordinary income recapture under §§ 1245 and 1250 are ineligible for installment reporting. Therefore, the § 1245 or § 1250 gain realized must be recognized in the year of sale, and the installment sale gain is the remaining gain. a. The $320,000 sales price is computed as follows: Cash down payment $20,000 + note payable to the seller $300,000. The contract price is the same as the sales price here. The total gain of $220,000 is computed as: $320,000 sales price - $100,000 adjusted basis ($250,000 cost- accumulated depreciation $150,000). b. Of the realized gain of $220,000, the $60,000 § 1250 recapture must be recognized in the year of sale. Of the $160,000 ($220,000 - $60,000) remaining § 1231 gain, $10,000 must be recognized in the year of sale as follows: ($160,000 remaining gain/$320,000 contract price) x $20,000 cash collected in 2020 = 50% x $20,000 = $10,000. ch16

In 2020, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $25,000. The clients signed notes receivable to Chaya that have a fair market value of $22,000 at year-end. In addition, Chaya sold a 36-month service contract on June 1, 2020, and received payment in full of $12,000. Round any division to four decimal places. If required, round your final answer to the nearest dollar. How much gross income does Chaya report from these transactions in 2020? 1. From the services to clients: 2. From the service contract:

Answers: $25,000; 2,333. Services to Clients = $ amount specified Service Contracts = Payment Received x (Months past/Total months) Under the accrual method, an item is generally included in gross income for the year in which it is earned, regardless of when the income is collected. An item of income is earned when (1) all of the events have occurred to fix the taxpayer's right to receive the income and (2) the amount of income (the amount the taxpayer has a right to receive) can be determined with reasonable accuracy. An accrual basis taxpayer's amount of income and the tax year the income is recognized are based on its right to receive the income. Thus, unlike in the case of a cash basis taxpayer, the fair market value of a receivable is irrelevant. If an accrual basis taxpayer receives prepayment of income for services that will not be fully earned by the end of the following year, the unearned amount at the end of the year of receipt must be allocated to the following year. However, prepaid rental income and prepaid interest income must be recognized in the year of receipt and may not be deferred. In a situation where the accrual basis taxpayer's right to income is being contested and the income has not yet been collected, generally, no income is recognized until the dispute has been settled. Before the settlement, "all of the events have not occurred that fix the right to receive the income". In 2020, Chaya reports income of $27,333 ($25,000 + $2,333), computed as follows:(1) Chaya must include $25,000, the amount it has the right to receive, in its gross income rather than the fair market value of the notes of $22,000.(2) Chaya recognizes $2,333 gross income in 2019 ($12,000 x 7/36 = $2,332.80, rounded to $2,333). Note: Chaya will report the balance of the service contract income in 2020 ($9,667). ch16

On June 5, 2019, Javier Sanchez purchased and placed in service a new 7-year class asset costing $560,000 for use in his landscaping business, which he operates as a single member LLC (Sanchez Landscaping LLC). During 2019, his business generated a net income of $945,780 before any § 179 immediate expense election. Rather than using bonus depreciation, Javier would like to use § 179 to expense $200,000 of this asset and then use regular MACRS to cost recover the remaining cost. If required round your intermediate computations and final answers to the nearest dollar. Click here to access the depreciation table to use for this problem. a. Determine the cost recovery deductions (including first year additional depreciation) that Javier Sanchez can claim with respect to this asset in 2019 and 2020.Total cost recovery deduction in 2019:______________ Total cost recovery deduction in 2020: $____________

Answers: $251,444; $88,164. Section 179 (Election to Expense Certain Depreciable Business Assets) permits the taxpayer to elect to write off up to $1,020,000 in 2019 ($1,040,000 in 2020) of the acquisition cost of tangible personal property used in a trade or business. Amounts that are expensed under § 179 may not be capitalized and depreciated. The § 179 expensing election is an annual election that applies to the acquisition cost of property placed in service that year. The immediate expense election generally is not available for real property or for property used for the production of income. Any elected § 179 expense is taken before additional first-year depreciation is computed. The base for calculating the remaining standard MACRS deduction is net of the § 179 expense and any additional first-year depreciation. Two additional limitations apply to the amount deductible under § 179. First, the ceiling amount on the deduction is reduced dollar for dollar when § 179 property placed in service during the taxable year exceeds a maximum amount ($2,550,000 in 2019 and $2,590,000 in 2020). Second, the § 179 deduction cannot exceed the taxpayer's trade or business taxable income, computed without regard to the § 179 amount. Any § 179 amount in excess of taxable income is carried forward to future taxable years and added to other amounts eligible for expensing. The base for calculating the standard MACRS deduction is net of the § 179 expense and the additional first-year depreciation, if any. The MACRS applicable rate for the seven-year class property is 14.29% from Exhibit 8.3. Section 179 expense (no business income limitation)$200,000 2019 MACRS cost recovery [($560,000 - $200,000) × 0.1429; Exhibit 8.3]51,444 2019 Total deduction$251,444 2020 MACRS cost recovery [($560,000 - $200,000) × 0.2449; Exhibit 8.3] $88,164 CH13

Juan owned 200 shares of Circle Corporation stock (adjusted basis of $30,000). He sold 100 shares for $12,000. Twenty days later he purchased 100 shares of the same stock for $8,500. What is Juan's realized and recognized loss? What is his basis in the newly acquired shares? Juan has a realized loss of ____________ that __________ recognized. His basis in the newly acquired stock is ___________.

Answers: $3,000; is not; $11,500. Juan has a realized loss of $3,000 ($12,000 amount realized - $15,000 adjusted basis of 100 shares). However the loss is not recognized because it resulted from a wash sale. His basis in the newly acquired stock is $11,500 ($8,500 purchase price + $3,000 unrecognized loss from the wash sale). CH13

Heather owns 400 shares of Diego Corporation common stock for which she paid $4,000. She receives a nontaxable stock dividend of 20 shares of preferred stock on her common stock. The fair market values on the date of distribution of the preferred stock dividend are $20 a share for common stock and $100 a share for preferred stock. What is Heather's basis in the common and preferred shares? Heather's basis for the common stock is $

Answers: $3,200; $800. Fair market value of common (400 shares x $20) $8,000 Fair market value of preferred (20 shares x $100) $2,000 Total $10,000 Basis of common:($8,000/$10,000) x $4,000 $3,200 Basis of preferred: ($2,000/$10,000) x $4,000 $800 CH13

Shumpert, Inc., entered into a contract that was to take two years to complete, with an estimated cost of $900,000. The contract price was $1,300,000. Costs of the contract for 2019, the first year, totaled $675,000. a. What was the gross profit reported by the percentage of completion method for 2019? (Costs incurred / Estimated Costs) x (Contract Price -Estimated Costs) b. After the contract was completed at the end of 2020 at a total cost of $950,000, what was the gross profit reported by the percentage of completion method for 2020?

Answers: $300,000; $50,000. Under the percentage of completion method, a portion of the gross contract price is included in income during each period as the work progresses. Prior to the last year, this revenue is computed using a ratio of costs to date divided by estimated total costs. All of the costs allocated to the contract during the period are deductible from the accrued revenue. The revenue reported in the final period is simply the unreported revenue from the contract. Because the estimated total cost of the contract is an estimate that frequently differs from total actual costs, which are not known until the contract has been completed, the profit on a contract for a particular period may be overstated or understated. a. The gross profit reported by the percentage of completion method for 2019 was $300,000 {[($675,000/$900,000) x $1,300,000] - $675,000}. b. The gross profit reported in 2020 is adjusted for the additional costs incurred as follows: $1,300,000 − $950,000 = $350,000 less 2019 gross profit of $300,000 = $50,000. ch16

Lopez acquired a building on June 1, 2015, for $1,000,000. Compute the depreciation deduction assuming the building is classified as (a) residential and (b) non residential. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. a. Calculate Lopez's cost recovery deduction for 2020 if the building is classified as residential rental real estate.__________ b. Calculate Lopez's cost recovery deduction for 2020 if the building is classified as nonresidential real estate.___________

Answers: $36,360; $25,640. MACRS provides separate cost recovery tables for realty and personalty. Cost recovery allowances for real property, other than land, are based on recovery lives specified in the law. The IRS provides tables that specify cost recovery allowances for personalty and for realty. Under MACRS, the cost recovery period for residential rental real estate is 27.5 years, and the straight-line method is used for computing the cost recovery allowance. Residential rental real estate includes property where 80 percent or more of the gross rental revenues are from nontransient dwelling units (e.g., an apartment building). Hotels, motels, and similar establishments are not residential rental property. Low-income housing is classified as residential rental real estate. Nonresidential real estate uses a recovery period of 39 years; it also is depreciated using the straight-line method. Land improvements are in the 15-year MACRS class. All eligible real estate is depreciated using the mid-month convention. Regardless of when the property is placed in service, it is deemed to have been placed in service at the middle of the month. This allows for one-half month's cost recovery for the month the property is placed in service. If the property is disposed of before the end of the recovery period, one-half month's cost recovery is permitted for the month of disposition regardless of the specific date of disposition. Cost recovery is computed by multiplying the applicable rate by the cost recovery basis. a. Residential rental real estate: $1,000,000 x 0.03636 (Exhibit 8.8) = $36,360 b. Nonresidential rental real estate: $1,000,000 x 0.02564 (Exhibit 8.8) = $25,640 CH13

Benny purchased $400,000 of Peach Corporation face value bonds for $320,000 on November 13, 2019. The bonds had been issued with $80,000 of original issue discount (OID), because Peach was in financial difficulty in 2019. On December 3, 2020, Benny sold the bonds for $283,000 after amortizing $1,000 of the original issue discount. What are the nature and amount of Benny's gain or loss? Benny has a _________ ______________ from the sale of the bonds.

Answers: $38,000; long-term capital loss. Add Discount Amortization to PURCHASE PRICE Since the Peach Corporation bonds were original issue discount bonds, the discount amortization is treated as interest income by Benny and added to his basis for the bonds. Thus, his basis is $321,000 ($320,000 cost + $1,000 discount amortization) and his loss is $38,000 ($283,000 sale price - $321,000 basis). The loss is long-term capital loss because Benny held the bonds for investment (making them a capital asset) for more than one year. CH14

On December 30, 2020, Whitney sold a piece of property for $85,000. Her basis in the property was $40,000, and she incurred $1,200 in selling expenses. The buyer paid $5,000 down with the balance payable in $10,000 installments over the next eight years. In addition, the buyer assumed a $15,000 mortgage on the property. Under the installment sales method, what is the total contract price, the total gain on the sale, and the amount of gain reported in 2020? Round any division to four decimal places, and use that amount in subsequent computations. Round your final answer to the nearest dollar. Under the installment sales method, the total contract price is _________, the total gain on the sale is ______ and the amount of gain reported in 2020 is ________

Answers: $85,000; $58,800; $3,459. Under the general rule for computing the gain or loss from the sale of property, the taxpayer recognizes the entire amount of gain or loss upon the sale or other disposition of the property. Congress enacted the installment sales provisions to allow the taxpayer to spread the gain from installment sales over the collection period, when the taxpayer is best able to pay the tax. The installment method is a very important planning tool because of the tax deferral possibilities. The installment method applies to gains (but not losses) from the sale of property by a taxpayer who will receive at least one payment after the year of sale. The gain reported on each sale is computed using the following formula:(Total gain/Contract price) x Payments received during the tax year = Gain recognized in the tax year Total gain is the selling price reduced by selling expenses and the adjusted basis of the property. The selling price is the total consideration received by the seller, including notes receivable from the buyer and the seller's liabilities assumed by the buyer. Contract price is the selling price less the seller's liabilities that are assumed by the buyer. Generally, the contract price is the amount, other than interest, the seller will receive from the purchaser. Payments received are the collections on the contract price received in each tax year. This generally is equal to the cash received less the interest income collected for the period. If the buyer pays any of the seller's expenses, the seller regards the amount paid as a payment received. The $100,000 sales price is computed as follows: Cash down payment $5,000 + seller's mortgage assumed $15,000 + installments payable to the seller $80,000 (8 x $10,000). The contract price is $85,000 ($100,000 - $15,000 liabilities assumed). The total gain of $58,800 is computed as follows: $100,000 sales price - $1,200 selling expenses - $40,000 basis. Therefore, the recognized gain in 2020 is computed as follows: ($58,800 gain/$85,000 contract price) x $5,000 cash collected in 2020 = 0.6918 x $5,000 = $3,459. ch16

For 2020, Wilma has properly determined that her taxable income is $36,000, including $3,000 of unrecaptured § 1250 gain and $8,200 of 0%/15%/20% gain. Wilma qualifies for head-of-household filing status. Compute Wilma's tax liability and tax savings from the alternative tax on net capital gain. Round your answers to the nearest dollar . When computing Wilma's tax liability, what tax rate is used for: The $3,000 of unrecaptured § 1250 gain? _______ The $8,200 of 0%/15%/20% gain? __________ Wilma's tax liability is ___________ and the tax saving from the alternative tax computation is ___________

Answers: 12%; 0%; $3,054; $984. CH14

On July 1, Daniel Wright owned stock (held for investment) purchased 2 years earlier at a cost of $10,000 and having a fair market value of $7,000. On this date, he sold the stock to his son, William, for $7,000. William sold the stock for $6,000 to an unrelated person on November 1 of the same year. How should William report the stock sale (before any deduction) on his tax return?

As a short-term capital loss of $1,000. Losses are not allowed on sales or exchanges of property between related parties. A father and son are related parties for this purpose. Thus, Daniel's loss of $3,000 on the sale of the stock to William is disallowed. William takes as his basis for the stock the cost of $7,000. Since William's stock basis is determined by his cost (not by reference to Daniel's cost), there is no carryover of Daniel's holding period to William. Therefore, upon the sale of the stock to an unrelated party for $6,000, William realizes a short-term capital loss of $1,000. CH13

Roger inherited 100 shares of Periwinkle stock when his mother, Emily, died. Emily had acquired the stock for a total of $60,000 on November 15, 2016. She died on August 10, 2020, and the shares were worth a total of $55,000 at that time. Roger sold the shares for $36,000 on December 22, 2020. How much gain or loss does Roger recognize? What is the nature of that gain or loss? Roger's recognized _______ of $________ is a _________

Answers: loss; $19,000; long-term capital loss. The holding period for inherited property is treated as long-term no matter how long the property is actually held by the heir. The holding period of the decedent or the decedent's estate is not relevant for the heir's holding period. Roger has an adjusted basis equal to the $55,000 fair market value of the Periwinkle stock at the time of Emily's death. He has an automatic long-term holding period because the stock was inherited property. Therefore, his loss of $19,000 ($36,000 amount realized - $55,000 adjusted basis) is a long-term capital loss. CH14

Elliott has the following capital gain and loss transactions for 2020. a. Short-term capital gain$1,500 b. Short-term capital loss(3,600) c. Long-term capital gain (28%)12,000 d. Long-term capital gain (25%)4,800 e. Long-term capital gain (15%)6,000 f. Long-term capital loss (28%)(4,500) g. Long-term capital loss (15%)(9,000) After the capital gain and loss netting process,what is the amount and character of Elliott's gain or loss?Elliott has an overall ___________ of ____________

Answers: net long-term capital gain; $7,200. CH14

Coline has the following capital gain and loss transactions for 2020. a. Short-term capital gain $5,000 b. Short-term capital loss (2,100) c. Long-term capital gain (28%) 6,000 d. Long-term capital gain (15%) 2,000 e. Long-term capital loss (28%) (10,500) After the capital gain and loss netting process, what is the amount and character of Coline's gain or loss? Coline has an overall _________ of _________

Answers: net short-term capital gain; $400. COMBINE UNLIKE SIGN LONG TERM FIRST CH14

On January 1, 2011, Stephanie Bridges acquired depreciable real property for $50,000. She used straight-line depreciation to compute the asset's cost recovery. The asset was sold for $96,000 on January 3, 2020, when its adjusted basis was $38,000. a. What are the amount and nature of the gain if the real property is residential? There is a § ________ of ___________, of which _________ is treated as ___________

Answers: § 1231 gain; $58,000; $12,000; unrecaptured § 1250 gain. If the property is residential real property, the gain is § 1231 gain: Selling price$96,000 Adjusted basis(38,000) Recognized § 1231 gain$58,000 Of the $58,000 § 1231 gain, $12,000 is unrecaptured § 1250 gain because the $12,000 of depreciation taken is less than the $58,000 § 1231 gain. CH14

One of the elections a new corporation must make is its choice of an accounting period. Which of the following entities has the most flexibility in choosing an accounting period?

C corporation. Generally, C corporations may elect either a calendar or fiscal tax year, S corporations and personal service corporations are generally required to use a calendar year, and partnerships must use a "required" tax year. ch16

Powerful Partnership purchased real property in Year 1. In Year 4, the city where the property is located assessed taxes for sidewalks. How should Powerful Partnership treat the accrued taxes for this local improvement?

Capitalize the taxes by adding them to the property's adjusted basis. Taxes assessed for local benefit that tend to increase the value of real property, such as sidewalks, are a betterment and are added to the property's adjusted basis and are not currently deductible as tax expense. CH13

Under Sec. 444 of the Internal Revenue Code, certain partnerships can elect to use a tax year different from their required tax year. One of the conditions for eligibility to make a Sec. 444 election is that the partnership must

Choose a tax year in which the deferral period is not longer than 3 months. A partnership may elect, under Sec. 444, a fiscal year other than normally required and for which a business purpose does not exist. The fiscal year elected must be one with no more than a 3-month deferral period, i.e., the number of months between the beginning of the tax year selected and the end of the required tax year. For the election to be effective, a payment is required that approximates the tax the partners would have paid if the entity had used its required year. ch16

Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $40 million per year for the past 3 years. To purchase software, customers enter their credit card number to a secure website and receive a password that allows the customer to immediately download the software. As a result, Dart does not record accounts receivable or inventory on its books. Which of the following statements is correct?

Dart must use the accrual method of accounting. The accrual method of accounting must be used for C corporations unless they have less than $26 million average annual gross receipts in the preceding 3 years. If average revenues exceeded $40 million, the gross receipts must have been at least this amount. ch16

Which of the following will decrease the basis of property?

Depreciation. Return of capital. Recognized losses on involuntary conversions. All of the answers are 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. CH13

A cash-basis taxpayer should report gross income

For the year in which income is either actually or constructively received, whether in cash or in property. A cash-basis taxpayer should report gross income for the year in which income is either actually or constructively received in cash or property. Constructive receipt is when the payment is made available to the taxpayer or when the taxpayer has economic benefit of the funds. ch16

The uniform capitalization method must be used by I. Manufacturers of tangible personal property with average annual gross receipts of $30 million for the preceding 3 years II. Retailers of personal property with $2 million in average annual gross receipts for the 3 preceding years

I only. 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. A retailer that acquires property for resale must also capitalize the costs. However, an exception from the UNICAP rules exists for producers and resellers with annual gross receipts for the 3 preceding years of not more than $26 million. ch16

Ms. Birch purchased the following stocks: 300 shares of Music Corp. on 1/18/19 for $3,000 200 shares of Play Corp. on 2/11/19 for $2,000 600 shares of Fun Corp. on 4/27/19 for $16,000 100 shares of Book Corp. on 12/19/19 for $8,000 On April 27, 2020, Ms. Birch sold all of the above stock for the following amounts: Music Corp. $ 5,000 Play Corp. 10,000 Fun Corp. 4,000 Book Corp. 14,000 What are Ms. Birch's net long-term capital gains or losses (LTCG/LTCL) and short-term capital gains or losses (STCG/STCL) on the above transactions?

LTCG, $10,000; STCL, $6,000. For property acquired after 1988, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year. If the capital gain or loss is not long-term, it is short-term. The holding period of an asset begins on the day after acquisition and includes the disposal date. A net long-term capital gain is the excess of long-term capital gains over long-term capital losses. The two long-term transactions (Music Corp. and Play Corp.) resulted in a net long-term capital gain of $10,000. A net short-term capital gain is the excess of short-term capital gains over short-term capital losses. There were two short-term transactions (Fun Corp. and Book Corp.), resulting in a net short-term capital loss of $6,000. ch14

Which of the following is a capital asset?

Land held as an investment. All property is classified as a capital asset unless specifically excluded. Accounts receivable, inventory, and depreciable property or real estate used in a business are not capital assets. Land held as an investment, however, is a capital asset unless it is held by a dealer (the general rule and not an exception is being tested). CH14

On June 1, Year 1, Mr. Smart purchased investment land. On January 31, Year 2, Mr. Smart traded the land plus cash for some other investment land in a non-taxable exchange. On August 15, Year 2, he sold the land received in the non-taxable exchange for a gain. What is the character of Mr. Smart's gain for Year 2?

Long-term capital gain. If property received in an exchange has the same basis in whole or in part as that of the property given (and if the property given is a capital asset or a Sec. 1231 asset), the holding period of the property received includes the period for which the property given was held. Thus, when the property is sold, the holding period includes the holding period of the property exchanged, and capital assets held more than 1 year are treated as long-term. CH14

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. 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. ch14

During the current year, all of the following events occurred: On June 1, Ben Rork sold 500 shares of Kul Corp. stock. Rork had received this stock on May 1 as a bequest from the estate of his uncle, who died on March 1. Rork's basis was determined by reference to the stock's fair market value on March 1. Rork's holding period for this stock was

Long-term. Under Sec. 1223(11), if property acquired from a decedent is sold or otherwise disposed of by the recipient within 12 months of the decedent's death, then the property is considered to have been held for more than 12 months. Therefore, under Sec. 1223(3), it is long-term and subject to the maximum tax rate of the applicable ordinary income breakpoint. CH14

In order to adopt a fiscal tax year on its first federal income tax return, a corporate taxpayer must

Maintain books and records and report income and expenses using that tax year. Permission from the IRS is generally not needed to place a taxpayer's first tax year on either a calendar- or a fiscal-year basis. A taxpayer's first tax year is selected on the initial return. However, in order to adopt a fiscal year, the new taxpayer must adopt that year on the books and records before the due date for filing the return for that year (not including extensions). ch16

During 2020, Danny, a calendar-year taxpayer, acquired and placed in service the following business assets: January: Delivery trucks $ 50,000 March: Warehouse building 150,000 June: Computer system 30,000 September: Automobile 30,000 November: Office equipment 90,000 Which convention(s) is used to figure Danny's depreciation for 2020?

Mid-quarter for all assets except the warehouse building, which uses the mid-month. Under the MACRS rules, the mid-quarter convention must be used for all personal property placed in service during the year if substantial property was placed in service during the last 3 months of the year [Sec. 168(d)(3)]. Substantial property is defined as greater than 40% of the aggregate bases of personal property placed in service during the year. The $90,000 office equipment constitutes 45% ($90,000 ÷ 200,000) of all personal property placed in service, so the mid-quarter convention must be used. A mid-month convention is used in the year of acquisition for real property. Therefore, the mid-month convention is used for the warehouse building. CH13

In Year 1, Paul received a boat as a gift from his father. At the time of the gift, the boat had a fair market value of $60,000 and an adjusted basis of $80,000 to Paul's father. After Paul received the boat, nothing occurred affecting Paul's basis in the boat. In Year 3, Paul sold the boat for $75,000. What is the amount and character of Paul's gain?

Neither a gain nor a loss. For determining gain on the sale of property acquired by gift, the basis is the donor's adjusted basis. Paul's sale results in no gain ($75,000 sales price - $80,000 basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Thus, there is no loss ($75,000 sales price - $60,000 basis). Ch13

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. The half-year convention applies to all property placed in service after 1986 except for residential rental and nonresidential real property (to which the mid-month convention applies) and except when the mid-quarter convention applies. Under the half-year convention, all property to which it applies is treated as placed in service or disposed of at the midpoint of the year. CH13

A sole proprietor of a nutrition supplement store sold a truck for $15,000. Three years ago, the truck cost $30,000, and $21,360 depreciation was taken. What is the appropriate classification of the $6,360 gain for tax purposes?

Ordinary gain. As the property is depreciable, personal, trade or business property, it is subject to the Sec. 1245 recapture rules. These rules provide that any gain realized, to the extent of the lesser of gain realized or depreciation taken, is characterized as ordinary income. In this case, depreciation exceeds the realized gain, so the entire portion should be characterized as ordinary income. CH14

In a "like-kind" exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of

Rental real estate located in different states. Like-kind refers to the nature or character of the property. Real estate for real estate qualifies as a like-kind exchange even if the properties are as different as a rental office building and a parking lot, or even if the properties are located in different states. All other property, including stocks (and other securities and debt instruments) and partnership interests, is excluded from qualifying for like-kind exchange treatment. ch13

For the current year, the installment method may not be used for

Sales of real property (except farm property and certain sales of residential lots or timeshares) held by a dealer for sale in the ordinary course of business. Sales of personal property (except farm property) by dealers who regularly sell this type of personal property on an installment plan. Publicly traded equity securities. All of the answers are correct. Under current law, use of the installment method is usually disallowed for dispositions of property by dealers [Sec. 453(b)(2)]. 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 [Sec. 453(l)]. Additionally, in general, installment sales do not apply to publicly traded securities. ch16

Under the modified accelerated cost recovery system (MACRS) of depreciation for property placed in service after 1986,

Salvage value is ignored for purposes of computing the MACRS deduction. Salvage value is treated as zero in computing the amount allowable as a depreciation deduction under the MACRS. Used tangible property is depreciable under MACRS. The straight-line method is required for certain property, e.g., listed property. The 10-, 15-, and 20-year MACRS classes include certain real property, e.g., farm buildings. CH13

Platt owns land that is operated as a parking lot. A shed was erected on the lot for the related transactions with customers. With regard to capital assets and Sec. 1231 assets, how should these assets be classified? Land Shed

Sec. 1231 Sec. 1231 Capital assets are any property not excluded by IRC definition. Real property used in a trade or business is excluded. Section 1231 property includes all real or depreciable property used in the taxpayer's trade or business and held more than 1 year. CH14

Mary Brown purchased an apartment building on January 1, 2010, for $200,000. The building was depreciated using the straight-line method. On December 31, 2020, the building was sold for $210,000 when the asset basis net of accumulated depreciation was $160,000. On her 2020 tax return, Brown should report

Section 1231 gain of $50,000. When depreciable property used in a trade or business is sold at a gain, first Sec. 1245 and Sec. 1250 are applied; then the balance of the gain not recaptured as ordinary income is Sec. 1231 gain. In this case, Sec. 1245 does not apply, and Sec. 1250 recapture is limited to the excess of accelerated depreciation over straight-line depreciation. Since the building was depreciated using the straight-line method, the entire $50,000 gain ($210,000 - $160,000) is Sec. 1231 gain, $40,000 of which is attributable to straight-line depreciation and taxed at the maximum Sec. 1250 unrecaptured gains rate of 25%. ch14

In Year 1, Rick bought a collectible watch for his own use at a cost of $8,000. In Year 5, when the fair market value was $12,000, Rick gave this watch to his son, Chris. No gift tax was due. Which of the following correctly states the holding period and the type of asset? Holding Period Type of Asset

Starts Year 1 Capital asset The basis of property acquired by gift is generally the same as the basis in the hands of the donor. The holding period of property that has a transferred/carryover basis includes the holding period of the prior owner. Chris's holding period, therefore, begins in Year 1 when Rick purchased the watch. Capital assets include all property held by a taxpayer unless excluded by the IRC. Personal-use property, such as jewelry, is a capital asset. ch14

In Year 1, Iris King bought a diamond necklace for her own use at a cost of $10,000. In Year 6, when the fair market value was $12,000, Iris gave this necklace to her daughter, Ruth. No gift tax was due. Ruth's holding period for this gift

Starts in Year 1. The basis of property acquired by gift is generally the same as the basis in the hands of the donor. The holding period of property that has a transferred/carryover basis includes the holding period of the prior owner. Ruth's holding period, therefore, begins in Year 1 when Iris purchased the necklace. ch14

How is the depreciation deduction of nonresidential real property, placed in service in 2020, determined for regular tax purposes using MACRS?

Straight-line method over 39 years. Nonresidential real estate placed in service in 2020 has a 39-year recovery period using the straight-line depreciation method. CH13

In Year 1, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In Year 2, after filing its Year 1 federal income tax return, Stewart determined that the exact amount was $6,000. Which of the following statements is true?

The $1,000 difference is includible in Stewart's Year 2 income tax return. .Under the accrual method of accounting, income is includible in gross income when all the events have occurred that fix the right to receive the income and the amount can be determined with reasonable accuracy. If an amount of income is properly accrued on the basis of a reasonable estimate and the exact amount is subsequently determined, the difference, if any, shall be taken into account for the taxable year in which such determination is made. ch16

Which one of the following statements is true with regard to an individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest?

The bond's basis is reduced by the amortization. An election may be made to amortize the premium on a bond yielding taxable interest income. If the premium is amortized, the basis of the bond must be reduced by the amount of premium that is amortized. CH14

A C corporation must use the accrual method of accounting in which of the following circumstances?

The business has more than $50 million in average sales. The cash method may be used only by PSCs, S corporations, and C corporations that have average annual gross receipts of not more than $26 million in the 3 preceding tax years. ch16

The basis in property inherited from a decedent may be determined as follows:

The fair market value at the date of death or the fair market value at an alternative valuation date. 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. Ch13

The basis of property received in exchange for service is determined by which of the following?

The fair market value of the property received. The receipt of property for services provided is a taxable transaction. Accordingly, the fair market value of the property must be included in gross income as compensation, and the basis of the property will be its fair market value. CH13

If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on

The last day of the current taxable year. Treasury Regulation 1.165-5 states that the loss on a capital asset that becomes wholly worthless in the current year is deductible for a loss, but only as if it were from the sale of the asset on the last day of the taxable year. Therefore, because the security became worthless in the current year, it is treated as sold on the last day of the taxable year. ch14

Maggie and Simon each have a 50% interest in a partnership that started business October 1. Maggie uses a calendar year, while Simon has a fiscal year ending November 30. Which of the following is true?

The partnership may use the fiscal year ending September 30, provided a Sec. 444 election and payment are made, and the partnership may use the fiscal year ending November 30, as that results in the least deferral. A partner reports his or her distributive share of partnership items, including guaranteed payments, in that tax year of the partner within (or with) which the partnership's tax year ended. Unless an exception applies, the partnership must use a required tax year. The required tax year that applies is the first of 1., 2., or 3. following. The partners, not the partnership, are obligated to make any estimated tax payments. 1. Majority interest tax year is the tax year of partners owning more than 50% of partnership capital and profits if they have the same tax year on the first day of the partnership tax year. 2. Principal partners' tax year is the same tax year of all principal partners, i.e., partners owning 5% or more in capital or profits. 3. Least aggregate deferral tax year is determined by multiplying each partner's ownership percentage by the number of months of income deferral for each possible partnership tax year and then selecting the tax year that produces the smallest total tax deferral. Under Sec. 444, a partnership may elect a tax year that is neither the required year nor a natural business year. The year elected may result in no more than 3 months' deferral (between the beginning of a tax year elected and the required tax year). The partnership must also pay an amount approximating the amount of additional tax that would have resulted had the election not been made. ch16

In figuring taxable income, which of the following is not an acceptable method of valuing inventories?

Using a constant price for so-called normal quantity of materials or goods in stock. The following are some of the inventory practices that are not recognized for tax purposes: 1. Deducting a reserve for price changes or an estimated amount for depreciation in the value of the inventory 2. Taking work in process or other parts of the inventory at a nominal price or less than its full value 3. Omitting part of the stock on hand 4. Using a constant price or nominal value for so-called normal quantity of materials or goods in stock 5. Including stock in transit, shipped either to or by the taxpayer, the title to which the taxpayer does not hold 6. Separating direct production costs into fixed and variable production cost classifications and then allocating only the variable costs to cost of goods produced, while treating fixed costs as period costs that are currently deductible (the direct cost method) 7.Treating all or almost all indirect production costs (whether fixed or variable) as period costs that are currently deductible (the prime cost method) ch16

Which of the following types of costs are required to be capitalized under the Uniform Capitalization Rules of Code Sec. 263A?

Warehousing. UNICAP rules require the capitalization of all expenses necessary to bring the asset to its intended use. Storage of an asset prior to its intended use would qualify as a cost incurred to bring it to its full use and should be capitalized under UNICAP.

Arnold gave land to his son, Bruce. Arnold's basis in the land was $100,000, and its fair market value at the date of the gift was $150,000. Bruce borrowed $130,000 from a bank; he used the funds to improve the property. He sold the property to Della for $360,000. Della paid Bruce $90,000 in cash, assumed his $120,000 mortgage, and agreed to pay $150,000 in two years. Bruce's selling expenses were $10,000. Della is going to pay adequate interest. Compute the following amounts: a. What is Bruce's basis in the land at the time of the sale? b. When computing his realized gain, what amount does Bruce use as the selling price and as the contract price? Selling price: Contract price: c. What is Bruce's installment sale gain in the year of sale?Bruce's total realized gain on the sale is __________, but his recognized gain in the year of the sale is ___________

a. b. $230,000; $360,000; c. $240,000; $120,000; $45,000. Under the general rule for computing the gain or loss, the taxpayer recognizes the entire amount of gain or loss upon the sale or other disposition of the property. However, the installment method allows the taxpayer to spread the gain from the installment sale over the collection period, when the taxpayer is best able to pay the tax. And, as a general rule, eligible sales must be reported by the installment method. A special election is required to report the gain by any other method of accounting. The installment method applies to gains (but not losses) from the sale of property by a taxpayer who will receive at least one payment after the year of sale. The gain reported on each sale is computed using the following formula: [Total Gain / Contract Price x (Payments Received) = Recognized Gain.] For many years, practically all gains from the sale of property were eligible for the installment method. However, over the years, the Code has been amended to deny the use of the installment method for the following: Gains on property held for sale in the ordinary course of business. Depreciation recapture under § 1245 or § 1250. Gains on stocks or securities traded on an established market. As an exception to the above, the installment method may be used to report gains from sales of the following: Time-share units, Residential lots, any property used or produced in the trade or business of farming. Since the property was acquired as a gift, the basis used for a gain is the donor's carryover basis. In addition, any improvements made by Bruce to the land are capitalized and become part of the cost basis. Therefore, the basis is $230,000 ($100,000 + $130,000). The contract price is the selling price less the seller's liabilities that are assumed by the buyer. In this case, the contract price is $240,000 ($360,000 sale price - $120,000 mortgage assumed). The selling price is the total consideration received by the seller, including notes receivable from the buyer and the seller's liabilities assumed by the buyer. The selling price is $360,000 ($90,000 down payment + $150,000 installment note + $120,000 mortgage ch16

Compute Mary's income or deductions for 2020 using (1) the cash basis and (2) the accrual basis for each of the following. a. In May 2020, Mary paid a license fee of $1,200 for the period June 1, 2020, through May 31, 2021 b. In December 2020, Mary collected $10,000 for January 2021 rents. In January 2020, Mary collected $2,000 for December 2020 rents. c. In June 2020, Mary paid $7,200 for an office equipment service contract for the period July 1, 2020, through December 31, 2021. d. In June 2020, Mary purchased office furniture for $273,000. She paid $131,000 in cash and gave a $142,000 interest-bearing note for the balance. The office furniture has a MACRS cost recovery period of seven years. Mary did not make the § 179 election and elected not to take additional first-year depreciation.

a. $1,200; $1,200. Since the contract is for one year, both the accrual and cash basis taxpayers can deduct the license in 2020. b. $10,000; $12,000. Both the accrual and cash basis taxpayers must report the $10,000 prepaid rental income in 2020. In addition, the accrual basis taxpayer must report in 2020 the $2,000 accrued rents for December 2020 collected in January 2021. The cash basis taxpayer would report the $2,000 in 2021 when it is collected. c. $2,400; $2,400. Because the service contract provides benefits for more than 12 months, both the cash and accrual basis taxpayers must capitalize and amortize the $7,200 payment, deducting $2,400 in 2020. (6/18 x $7,200 = $2,400). d. $39,012; $39,012. Both the cash and accrual method taxpayers must capitalize the $273,000 and will be allowed a MACRS cost recovery deduction of $39,012 ($273,000 x .1429). ch16

Tab exchanges real estate used in his business along with stock for real estate to be held for investment. The stock transferred has an adjusted basis of $45,000 and a fair market value of $50,000. The real estate transferred has an adjusted basis of $85,000 and a fair market value of $190,000. The real estate acquired has a fair market value of $240,000. What is Tab's recognized gain or loss? Answer: ___________ What is Tab's basis in the new real estate? ___________

a. 5,000 b. 135,000 CH13

Surendra's personal residence originally cost $340,000 (ignoring the value of the land). After living in the house for five years, he converts it to rental property. At the date of conversion, the fair market value of the house is $320,000. a. Surendra's basis for loss for the rental property is $_________ b. Surendra's basis for depreciation for the rental property is _________ c. Surendra's basis for gain for the rental property is __________ d. Could Surendra have obtained better tax results if he had sold his personal residence for $320,000 and then purchased another house for $320,000 to hold as rental property?

a. Answer: $320,000. The original basis for loss on personal-use assets converted to business or income-producing use is the lower of the property's adjusted basis or fair market value on the date of conversion. The gain basis for converted property is the property's adjusted basis on the date of conversion. Surendra's basis for loss is $320,000, the lower of the adjusted basis of $340,000 or the fair market value at the date of the conversion of $320,000. b. Answer: $320,000. The basis for loss is also the basis for depreciating the converted property. This is an exception to the general rule that the basis for depreciation is the gain basis (e.g., property received by gift). This exception prevents the taxpayer from recovering a personal loss indirectly through depreciation of the higher original basis. After the property is converted, both its basis for loss and its basis for gain are adjusted for depreciation deductions from the date of conversion to the date of disposition. These rules apply only if a conversion from personal to business or income-producing use has actually occurred. Surendra's basis for depreciation is $320,000, the same as the basis for loss. c. Answer: $340,000. The gain basis for converted property is the property's adjusted basis on the date of conversion. The tax law is not concerned with gains on converted property because gains are recognized regardless of whether property is business, income-producing, or personal use. Surendra's basis for gain is the adjusted basis of $340,000. d. Answer: No, since this a personal use asset, this realized loss is not recognized. In certain cases, a realized gain or loss is not recognized upon the sale or other disposition of property. Examples include nontaxable exchanges, losses realized upon the sale, exchange, or condemnation of personal use assets (as opposed to business or income-producing property) and gains realized upon the sale of a residence. His residence is a personal use asset. If he sold his residence for $320,000, he would realize a loss of $20,000 on the sale ($320,000 − $340,000). Since this a personal use asset, this realized loss is not recognized (it is disallowed under § 267). CH13

Kevin purchases 1,000 shares of Bluebird Corporation stock on October 3, 2020, for $300,000. On December 12, 2020, Kevin purchases an additional 750 shares of Bluebird stock for $210,000. According to market quotations, Bluebird stock is selling for $285 per share on December 31, 2020. Kevin sells 500 shares of Bluebird stock on March 1, 2021, for $162,500. a. What is the adjusted basis of Kevin's Bluebird stock on December 31, 2020? b. What is Kevin's recognized gain or loss from the sale of Bluebird stock on March 1, 2021, assuming the shares sold are from the shares purchased on December 12, 2020? Kevin's recognized ________ is __________. c. What is Kevin's recognized gain or loss from the sale of Bluebird stock on March 1, 2021, assuming Kevin cannot adequately identify the shares sold? Kevin has a recognized _______ of _____

a. Answer: $510,000. The basis of property is generally the property's cost. Cost is the amount paid for the property in cash or other property. Kevin's adjusted basis for Bluebird Corporation stock on December 31, 2020, is $510,000 ($300,000 + $210,000). b. Answers: gain; $22,500. Since the shares sold are from the shares purchased on December 12, 2020, the cost per share is $280 ($210,000/750 shares). Amount realized $162,500 Less: adjusted basis [500 shares x $280 per share($210,000/750 shares)] (140,000) Realized gain $22,500 Recognized gain $22,500 c. Answers: gain; $12,500. If Kevin cannot adequately identify the shares sold, a FIFO presumption is made. Thus, the 500 shares sold are presumed to come from the 1,000 shares purchased on October 3, 2020, for $300,000 (i.e., $300 per share). Amount realized $162,500 Less: adjusted basis [500 shares x $300 per share($300,000/1,000 shares)] (150,000) Realized gain $12,500 Recognized gain $12,500 CH13

As sole heir, Dazie receives all of Mary's property (adjusted basis of $11,400,000 and fair market value of $13,820,000). Six months after Mary's death, the fair market value is $13,835,000. a. Assuming an estate return is filed, can the executor of Mary's estate elect the alternate valuation date and amount? _______ b. What is Dazie's basis for the property? c. Assume instead that the fair market value six months after Mary's death is $13,800,000. Assuming an estate return is filed, can the executor of Mary's estate elect the alternate valuation date and amount? ___ Dazie's basis for the property is ________

a. Answer: No. The basis of property acquired from a decedent is generally the property's fair market value at the date of death (referred to as the primary valuation amount). The property's basis is the fair market value six months after the date of death if the executor or administrator of the estate elects the alternate valuation date for estate tax purposes. This amount is referred to as the alternate valuation amount. In this case, the executor cannot elect the alternate valuation date and amount. In order to do so, the following requirements must be satisfied. The election must result in the reduction of the value of the gross estate. The election must result in the reduction of the estate tax liability. The alternate valuation date and amount are only available to estates for which an estate tax return must be filed (generally, estates with a valuation in excess of $11,580,000 in 2020. This provision prevents the alternate valuation election from being used to increase the basis of the property to the beneficiary for income tax purposes without simultaneously increasing the estate tax liability (because of estate tax deductions or credits). b. Answer: $13,820,000. The basis of property acquired from a decedent is generally the property's fair market value at the date of death (referred to as the "primary valuation amount"). The property's basis is the fair market value six months after the date of death if the executor or administrator of the estate elects the alternate valuation date for estate tax purposes. Dazie's basis for the property is the fair market value of $13,820,000 on the date of Mary's death (primary valuation date). c. Answers: Yes; $13,800,000. In this case, the fair market value at the alternate valuation date is less than at the primary valuation date. Assuming that election also results in the reduction of the estate tax liability, it can be made. So, Dazie's basis for the property now becomes $13,800,000. CH13

Sally owns real property for which the annual property taxes are $9,000. She sells the property to Kate on March 9, 2020, for $550,000. Kate pays the real property taxes for the entire year on October 1, 2020. Assume a 365-day year. Round any division to four decimal places. Round your final answers to the nearest dollar. a. How much of the property taxes can be deducted by Sally and how much by Kate? Sally can deduct _____ and Kate can deduct ____ of the property taxes. b. What effect does the property tax apportionment have on Kate's adjusted basis in the property? Kate's adjusted basis for the property is _____ by the _________ she paid that is apportioned to Sally. c. What effect does the apportionment have on Sally's amount realized from the sale? Sally paid none of the real property taxes and ______ permitted to deduct the apportioned share of _____. Her amount realized is _____ by this amount. d. How would the answers in parts (b) and (c) differ if Sally paid the taxes? If Sally paid the taxes, Sally's amount realized would be ________. Kate's adjusted basis would be_____

a. Answers: $1,652; $7,348. For the purpose of the allocation, the buyer is treated as owning the property on the date of the sale. The real property taxes must be apportioned between Sally and Kate as follows [the day of sale is apportioned to the buyer; so Sally's apportionment is based on 67 days (January 1 through March 8, including March 8)], and the property tax deductions are: Sally: (67/365) x $9,000 = $1,652 Kate: (298/365) x $9,000 = $7,348 Note: Days that Sally owned the property during the year: 31 + 28 + 8 = 67 days.Days that Kate owns the property during the year: 365 - 67 = 298 days. b. Answers: increased; $1,652. Even though Kate paid the real property taxes of $9,000 for the entire year, she is permitted to deduct only her apportioned share of $7,348. Her adjusted basis for the property is increased by the $1,652 she paid that is apportioned to Sally. Cost $550,000 Plus: property taxes she paid apportioned to Sally 1,652 Equals: adjusted basis $551,652 c. Answers: is; $1,652; increased. Since Sally paid none of the real property taxes and is permitted to deduct the apportioned share of $1,652, her amount realized is increased by this amount. Selling price $550,000 Plus: Property taxes apportioned to Sally 1,652 Equals: amount realized$551,652 d. Answers: $542,652; $542,652. Sally's amount realized would be her cost minus the real property taxes apportioned to Kate ($550,000 - $7,348= $542,652). Kate's adjusted basis would be her cost minus the real property taxes apportioned to her ($550,000 - $7,348 = $542,652). CH13

On September 18, 2020, Gerald received land and a building from Luna as a gift. No gift tax was paid on the transfer. Luna's records show the following: Asset Adjusted Basis FMV Land $100,000 212,000 Building 80,000 100,000 Do not round any division. Round your final answer to the nearest dollar. a. Determine Gerald's adjusted basis for the land and building. Gerald's adjusted basis for the land is _________ Gerald's adjusted basis for the building is __________ b. Assume instead that the fair market value of the land was $87,000 and that of the building was $65,000. Determine Gerald's adjusted basis for the land and building. Gerald's basis for gain: Gerald's adjusted basis for the land is ____________ Gerald's adjusted basis for the building is ___________ Gerald's basis for loss: Gerald's adjusted basis for the land is ___________ Gerald's adjusted basis for the building is ____________

a. Answers: $100,000; $80,000. The basis rules for gifts of property are as follows: If the fair market value of the property on the date of the gift exceeds (or is equal to) the donor's basis, then the recipient's (donee's) basis is the same as the donor's (i.e., a carryover basis). If the fair market value of the property on the date of the gift is less than the donor's basis, then special dual basis rules apply. Here, the donee has one basis for measuring a gain and a different basis for measuring a loss. This special rule is in place to prevent the shifting of losses (typically among family members) to the individual who would receive the greatest benefit. Under this rule, the donee's gain basis is the donor's adjusted basis; the donee's loss basis is the fair market value of the property. Because the fair market value exceeds the donor's basis on the date of the gift, Gerald's total basis in the assets received carries over from Luna. So Gerald will have a basis in the land of $100,000 and a basis in the building of $80,000. b. Answers: $100,000; $80,000; $87,000; $65,000. Since the land and building have declined in value, none of the gift tax paid (zero was paid in this example) would be considered in calculating Gerald's adjusted basis. Gerald's basis for gain is: Land $100,000 Building 80,000 If the donee disposes of gift property in a transaction that results in a loss, the basis to the donee is the lower of the donor's adjusted basis or the fair market value on the date of the gift. Gerald's basis for loss, which is the lower of Luna's adjusted basis or the FMV at the date of the gift, is: Land $87,000 Building 65,000

On June 1, 2016, Skylark Enterprises, a calendar year LLC reporting as a sole proprietorship, acquired a retail store building for $500,000 (with $100,000 being allocated to the land). The store building was 39-year real property, and the straight-line cost recovery method was used. The property was sold on June 21, 2020, for $385,000. a. Compute the cost recovery and adjusted basis for the building.Total cost recovery is _____________ and the adjusted basis for the building is ____________ b. What are the amount and nature of Skylark's gain or loss from disposition of the property? What amount, if any, of the gain is unrecaptured § 1250 gain? There is _____________ of recognized ______ on the sale of the property, of which ________ is subject to § 1250 recapture.

a. Answers: $41,032; $358,968. The adjusted basis is equal to the cost of the asset less the depreciation taken on the asset over the years. Cost recovery can be computed using the table for 39-year nonresidential real property. The depreciable cost of the store excludes the value of the land. Building cost $400,000 2016 cost recovery rate (partial year) 0.01391 2017 cost recovery rate 0.02564 2018 cost recovery rate 0.02564 2019 cost recovery rate 0.02564 2020 cost recovery rate (0.02564 x 5.5 / 12) (partial year)0.01175 Total recovery rate x 0.10258 Total cost recovery $41,032 Adjusted basis ($400,000 - $41,032) of building $358,968 b. Answers: $73,968; loss; none. CH14

Swallow Company is a large real estate construction company that has made an S election. The company reports its income using the percentage of completion method. In 2021, the company completed a contract at a total cost of $4,800,000. The contract price was $7,200,000. At the end of 2020, the year the contract was begun, Swallow estimated that the total cost of the contract would be $5,400,000. Total accumulated cost on the contract at the end of 2020 was $1,800,000. The relevant tax rate is 35%, and the relevant Federal interest rate is 5%. Assume that all income tax returns were filed and taxes were paid on March 15 following the end of the calendar tax year. Round any gross profit division to 7 decimal places and use rounded amounts in subsequent computations. Then, round your final answer to the nearest dollar. a. The gross profit on the contract for 2020 is ________ and for 2021 it is ___________ Round any division to 3 decimal places and use in subsequent computations. b. The lookback interest due with the 2021 return is ___________

a. Answers: $600,000; $1,800,000. The percentage of completion method must be used to account for long-term contracts unless the taxpayer qualifies for one of the two exceptions that permit the completed contract method to be used (home construction contracts and certain other real estate construction contracts). Under the percentage of completion method, a portion of the gross contract price is included in income during each period as the work progresses. The revenue accrued each period (except for the final period) is computed as follows: Contract Costs Incurred During the Period / Estimated Total Cost of the Contract x Contract Price. Gross Profit = Revenue - Costs Incurred. 2020 Gross profit = (Total cost of date / Total estimated cost x Contract price) - Total cost of date $1,800,000 / $5,400,000 = .3333333 x $7,200,000= $2,399,999.76 $2,399,999.76 - $1,800,000 = $599,999.76, rounded to $600,000. 2021 Gross profit = Contract price - Total contract cost - 2020 gross profit = $7,200,000 - $4,800,000 - $600,000 = $1,800,000. b. Answer: $5,250. In the year a contract is completed, a lookback provision requires the recalculation of annual profits reported on the contract under the percentage of completion method. Interest is paid to the taxpayer if taxes were overpaid, and interest is payable by the taxpayer if there was an underpayment. To determine the lookback interest it is first necessary to determine the gross profit for 2020, given the actual cost of the contract. Corrected 2020 Gross profit = ($1,800,000 / $4,800,000 x $7,200,000) - $1,800,000 = $900,000 Taxes paid on the 2020 gross profit = $210,000 (0.35 x $600,000) Taxes that should have been paid on actual 2020 gross profit = $315,000 (0.35 x $900,000) Interest for one year at 5% is $5,250 [($315,000 - $210,000) x .05]. This amount is to be paid by Swallow. ch16

Ross Company is a C corporation providing property management services. Ross has used the cash method since inception because its gross receipts did not exceed $26,000,000. This year its average annual gross receipts for the prior three years crossed the $26,000,000 mark, requiring Ross to change from the cash method to the accrual method. At the end of its prior year, Ross had accounts receivable of $850,000 and accounts payable of $540,000. a. What adjustment to taxable income must Ross make due to the change in accounting method? The § 481(a) adjustment includes an increase of ________ and a decrease of ________ for a net adjustment of __________ . This is a __________ adjustment, meaning that it will _________ Ross Company's taxable income. b. When must Ross include this adjustment in its income? Adjustment > 3,000 or voluntary THEN Spread over 4yrs

a. Answers: $850,000; $540,000; 310,000; positive; increase. The term accounting method encompasses not only the overall accounting method used by the taxpayer (the cash or accrual method) but also the treatment of any material item of income or deduction. Thus, a change in the method of deducting property taxes from a cash basis to an accrual basis that results in a deduction for taxes in a different year constitutes a change in an accounting method. Another example of an accounting method change is a change involving the method or basis used in the valuation of inventories. However, a change in treatment resulting from a change in the underlying facts does not constitute a change in the taxpayer's method of accounting. In the year of a change in accounting method, an adjustment is generally required in order to prevent the omission or duplication of income or expense items. As a cash method taxpayer, Ross did not include accounts receivable or payable in its taxable income. Once it becomes an accrual method taxpayer, it must act as if it had always been an accrual method taxpayer. Thus, when Ross collects the $850,000 of receivables and pays the $540,000 of payables, as an accrual method taxpayer, it will not report any income or expenses. To ensure no income or deductions are omitted or duplicated by the accounting method change, Ross must compute a § 481(a) adjustment. This adjustment includes an increase of $850,000 and a decrease of $540,000 for a net § 481(a) adjustment of $310,000. This nets to a positive adjustment, meaning that it will increase Ross taxable income. Ross will file Form 3115 with its tax return for the year of change and send a copy to the IRS per the form instructions as well as per Rev.Proc. 2015-13, 2015-5 I.R.B. 419, and Rev.Proc. 2019-43, 2019-48 I.R.B. 1107. b. Answer: Over four years beginning with the year of change. If the adjustment is greater than $3,000, the taxpayer can elect to calculate the tax by spreading the adjustment over one or more previous years. The election is beneficial if the taxpayer's marginal tax rate for the prior years is lower than the marginal tax rate for the year of the change. To encourage taxpayers to voluntarily change (rather than wait for an IRS audit resulting in a required change) from incorrect methods and to facilitate changes from one correct method to another, the IRS generally allows the taxpayer to spread a positive adjustment into future years. One-fourth of the adjustment is applied to the year of the change, and one-fourth of the adjustment is applied to each of the next three taxable years. A negative adjustment must be deducted in the year of the change. Ross Company has a positive § 481(a) adjustment to taxable income that is ratably included over four years ($77,500 per year), beginning with the year of change. ch16

Based on the following events, complete the statements regarding the cash and accrual methods of accounting. a. Purchased new equipment, paying $50,000 cash and giving a note payable for $30,000 due next year. ______________ taxpayers must capitalize the cost of the equipment, ____________, and recover the cost through depreciation over the class life of the asset. b. Paid $3,600 for a three-year service contract on the new equipment. _______________ taxpayers must capitalize the prepaid expense and recover its cost through a three-year amortization. c. Collected $1,800 for services to be provided over the current and following years. Assume that the accrual basis taxpayer has not elected the special deferral method of § 451(c). _____________ taxpayers will report $1,800 in the year of receipt. d. Received a $3,000 note from a customer for services provided in the current year. The market value of the note was only $2,400. _____________ taxpayer includes the $3,000 in gross income in the year the services are performed. _______________ taxpayer will include the $2,400 in income when the note is received.

a. Answers: Both the cash and accrual basis taxpayers; $80,000. Under the accrual method, an item is generally included in gross income for the year in which it is earned, regardless of when the income is collected. An item of income is earned when (1) all of the events have occurred to fix the taxpayer's right to receive the income and (2) the amount of income (the amount the taxpayer has a right to receive) can be determined with reasonable accuracy. Under the cash method, income is not recognized until the taxpayer actually receives, or constructively receives, cash or its equivalent (e.g., the receipt of accounts receivable does not trigger income until collected). Cash is constructively received if it is available to the taxpayer. Deductions are generally permitted in the year of payment. Thus, year-end accounts payable and accrued expenses are not deducted in the determination of taxable income. In many cases, a taxpayer using the cash method can choose the year in which a deduction is claimed simply by postponing or accelerating the payment of expenses. For fixed assets, however, the cash basis taxpayer claims deductions through depreciation or amortization, the same as an accrual basis taxpayer does. In addition, prepaid expenses must be capitalized and amortized if the life of the asset extends substantially beyond the end of the tax year. Both the cash and accrual basis taxpayers must capitalize the cost of the equipment, $80,000, and recover the cost through depreciation over the class life of the asset. b. Answer: Both the cash and accrual basis taxpayers. Both the cash and accrual basis taxpayers must capitalize the prepaid expense and recover its cost through a three-year amortization. c. Answer: Both the accrual and cash basis taxpayers. The cash basis taxpayer must recognize the $1,800 in the year of receipt. If the accrual basis taxpayer elected the special deferral method of § 451(c), it will report the same amount for book and tax purposes in the year of receipt and the balance of the $1,800 in the subsequent tax year. If the accrual method taxpayer has not elected the special deferral method of § 451(c), it will report $1,800 in the year received. d. Answers: Only the accrual basis taxpayer; Only the cash basis taxpayer. The accrual basis taxpayer must include the $3,000 in gross income in the year the services are performed. The cash basis taxpayer will include the $2,400 in income when the note is received with the remaining $600 recognized in the year the payment is collected. ch16

Pedro, age 57, is the sole owner of his principal residence, which he has owned and occupied for 10 years. Maria, his spouse, has lived there with Pedro for the full 10 years. He sells the house for a realized gain of $340,000. If an amount is zero, enter "0". a. Can Pedro use the § 121 exclusion if he and Maria file a joint return?________ If Pedro can use the § 121 exclusion, the maximum eligible amount of § 121 exclusion (before any limitations) is ______________ Their realized gain is ___________ and the recognized gain is ______________ b. Can Pedro use the § 121 exclusion if he files a separate return?_________ What is the maximum eligible amount of the exclusion?__________ The recognized gain is _________ c. Assume instead that the realized gain is $550,000 and a joint return is filed. The recognized gain is ___________ d. Assume instead that the realized gain is $550,000 and separate returns are filed. The recognized gain is ___________. e. Assume same facts as in requirement (a) except that Maria and Pedro have been married for only 18 months and that she has lived in his house only since their marriage. They file a joint return. The recognized gain is _________

a. Answers: Yes; $500,000; $340,000; $0. Pedro and Maria are eligible for a maximum § 121 exclusion of $500,000. One spouse, Pedro, meets the ownership requirement and both spouses meet the use requirement. Realized gain$340,000 Less: § 121 exclusion(340,000) Equals: Recognized gain$0 b. Answers: Yes; $250,000; $90,000. Pedro is eligible for a maximum § 121 exclusion of $250,000 on his separate return. As Maria has no ownership interest in the residence, her separate return reports nothing regarding the sale of the residence. Realized gain$340,000 Less: § 121 exclusion(250,000) Equals: Recognized gain$90,000 c. Answer: $50,000. Pedro and Maria are eligible for a maximum exclusion of $500,000. Realized gain$550,000 Less: § 121 exclusion(500,000) Equals: Recognized gain$50,000 d. Answer: $300,000. Pedro is eligible for a maximum § 121 exclusion of $250,000. As Maria has no ownership interest in the residence, her separate return reports nothing regarding the sale of the residence. Realized gain$550,000 Less: § 121 exclusion(250,000) Equals: Recognized gain$300,000 e. Answer: $90,000. If a married couple files a joint return, the $250,000 amount is increased to $500,000 if the following requirements are satisfied: Either spouse meets the at-least-two-years ownership requirement. Both spouses meet the at-least-two-years use requirement. Neither spouse is ineligible for the § 121 exclusion on the sale of the current principal residence because of the sale of another principal residence within the prior two years. Pedro is solely eligible for the § 121 exclusion on the sale of his house. While only Pedro needs to meet the ownership requirement, both Pedro and Maria need to meet the use requirement to be eligible for the exclusion. Realized gain$340,000 Less: § 121 exclusion(250,000) Equals: Recognized gain$90,000 CH13

Louis owns three pieces of land with an adjusted basis as follows: parcel A, $75,000; parcel B, $125,000; and parcel C, $175,000. Louis sells parcel A to his uncle for $50,000, parcel B to his partner for $120,000, and parcel C to his mother for $150,000. If an amount is zero, enter "0". a. What is the recognized gain or loss from the sale of each parcel? Parcel A:There is a ________ of ___________ Parcel B:There is a _________ of ___________ Parcel C:There is ________ of __________ b. If Louis's uncle eventually sells his land for $90,000, his recognized ________ will be __________. c. If Louis's partner eventually sells his land for $130,000, his recognized _______ will be _____________. d. If Louis's mother eventually sells her land for $165,000, she has __________ of _______

a. Answers: a recognized loss; $25,000; a recognized loss; $5,000; no recognized gain or loss; $0. Note: For § 267 purposes, members of the same family include siblings, spouse, ancestors, and lineal descendants. Therefore the uncle does not fall under § 267 rules. Parcel A: $50,000 sales price - $75,000 basis = $25,000 recognized loss. Parcel B: $120,000 sales price - $125,000 basis = $5,000 recognized loss. Parcel C: $150,000 sales price - $175,000 basis = $25,000 realized loss. No recognized loss under § 267. b. Answers: gain; $40,000. Realized gain or loss is the difference between the amount realized from the sale or other disposition of property and the property's adjusted basis on the date of disposition. If the amount realized exceeds the property's adjusted basis, the result is a realized gain. Conversely, if the property's adjusted basis exceeds the amount realized, the result is a realized loss. $90,000 sales price - $50,000 basis = $40,000 recognized gain. c. Answers: gain; $10,000. $130,000 sales price - $120,000 basis = $10,000 recognized gain. d. Answers: no recognized gain or loss; $0. $165,000 sales price - $150,000 basis = $15,000 realized gain, less $15,000 of the $25,000 previously disallowed loss = $0 recognized gain. CH13

Edith's warehouse (adjusted basis of $450,000) is destroyed by a hurricane in October 2020. Edith, a calendar year taxpayer, receives insurance proceeds of $525,000 in January 2021. Calculate Edith's realized gain or loss, recognized gain or loss, and basis for the replacement property under each of the following conditions. If an amount is zero, enter "0". a. She acquires a new warehouse for $550,000 in January 2021. The realized ________ is ___________. The recognized _______ is __________. Edith's basis for the replacement warehouse building is __________ b. She acquires a new warehouse for $500,000 in January 2021. The realized ______ is ___________ The recognized ______ is _________ Edith's basis for the replacement office building is ____________ c. Assume she does not acquire replacement property. The realized ______ is __________ The recognized ______ is ____________

a. Answers: gain; $75,000; gain; $0; $475,000. Amount realized $525,000 Less: adjusted basis (450,000) Equals: realized gain $75,000 Recognized gain $0 The transaction qualifies for § 1033 involuntary conversion treatment. Since Edith reinvested the $525,000 of insurance proceeds received in qualifying property, all of the $75,000 realized gain is postponed. Edith's basis for the replacement warehouse building is $475,000 [$550,000 (cost) - $75,000 (postponed gain)]. The latest date for Edith to acquire qualifying replacement property is December 31, 2023 (i.e., December 31, 2021 + 2 years). b. Answers: gain; $75,000; gain; $25,000; $450,000. The transaction qualifies for § 1033 involuntary conversion treatment. The realized gain is recognized only to the extent that the amount realized from the involuntary conversion exceeds the cost of the qualifying replacement property. Amount realized $525,000 Less: adjusted basis (450,000) Equals: realized gain $75,000 Edith reinvested part of the insurance proceeds received in qualifying property. Because not all of the insurance proceeds were reinvested, her recognized gain is calculated as follows: Amount realized (required reinvestment) $525,000 Less reinvestment (500,000) Equals deficiency $25,000 Recognized gain $25,000 Edith's basis for the replacement office building is $450,000 [$500,000 (cost) - $50,000 (postponed gain)]. c. Answers: gain; $75,000; gain; $75,000. None of the realized gain is postponed because Edith did not acquire qualifying replacement property. Amount realized $525,000 Less: adjusted basis (450,000) Equals: realized gain $75,000 Recognized gain $75,000 CH13

Larry is the sole proprietor of a trampoline shop. During 2020, the following transactions occurred. For each transaction, what are the amount and nature of recognized gain or loss? If an amount is zero, enter "0". a. Unimproved land adjacent to the store was condemned by the city on February 1. The condemnation proceeds were $15,000. The land, acquired in 1987, had an allocable basis of $40,000. Larry has additional parking across the street and plans to use the condemnation proceeds to build his inventory. There is a _____ of $_________ that is treated as __________ b. A truck used to deliver trampolines was sold on January 2, 2020 for $3,500. The truck was purchased on January 2, 2016, for $6,000. On the date of sale, the adjusted basis was zero. There is a ____ of ____ that is treated as ________ c. Larry sold an antique rowing machine at an auction. Net proceeds were $4,900. The rowing machine was purchased as used equipment 17 years ago for $5,200 and is fully depreciated. There is a ______ of _________ that is treated as _______ d. Larry sold an apartment building for $300,000 on September 1. The rental property was purchased on September 1, 2017, for $150,000 and was being depreciated over a 27.5-year life using the straight-line method. At the date of sale, the adjusted basis was $124,783. There is an overall _______ of __________. How much § 1250 recapture is recognized? _________ What is the amount of unrecaptured § 1250? _______ e. Larry's personal yacht was stolen on September 5. The yacht had been purchased in August at a cost of $25,000. The fair market value immediately preceding the theft was $19,600. Larry was insured for 50% of the original cost, and he received $12,500 on December 1. There is a tax loss (before any AGI limitations) of _____________ that is treated as nondeductible personal casualty loss . f. Larry sold a Buick on May 1 for $9,600. The vehicle had been used exclusively for personal purposes. It was purchased on September 1, 2016, for $20,800. There is a loss of _________ that is treated as nondeductible personal loss g. Larry's trampoline stretching machine (owned two years) was stolen on May 5, but the business's insurance company will not pay any of the machine's value because Larry failed to pay the insurance premium. The machine had a fair market value of $8,000 and an adjusted basis of $6,000 at the time of theft. There is a tax loss of __________ that is treated as business casualty loss . h. Assume Larry had AGI of $102,000 from sources other than those described above. He also has no nonrecaptured § 1231 lookback losses. What is Larry's 2019 AGI?Larry's 2020 AGI is $_______

a. Answers: loss; $25,000; § 1231 loss. Depreciable property and real property used in business are not capital assets. However, due to § 1231, when the disposition of depreciable property and real property used in business results in a net loss, § 1231 treats the loss as an ordinary loss rather than as a capital loss. Land: Condemnation proceeds$15,000 Allocable basis(40,000) Realized and recognized § 1231 loss($25,000) b. Answers: gain; $3,500; ordinary income under § 1245. If the disposition of depreciable property and real property used in business results in a net loss, § 1231 treats the loss as an ordinary loss rather than as a capital loss. Ordinary losses are fully deductible for adjusted gross income (AGI). The Code contains two major recapture provisions: § 1245 and § 1250. These provisions cause § 1231 gain to be treated initially as ordinary gain. The excess of the sales price over the original cost (or basis) is § 1231 gain. The taxpayer is only required to recognize § 1245 recapture ordinary gain equal to the lower of the depreciation taken or the gain recognized. Truck:Depreciation taken: $6,000 ($6,000 - $0) Adjusted basis: $0 Realized gain: $3,500 - $0 = $3,500 Recognized gain: $3,500 ordinary income under § 1245 c. Answers: gain; $4,900; ordinary income under § 1245. Section 1245 recapture provides, in general, that the portion of recognized gain from the sale or other disposition of § 1245 property that represents depreciation is recaptured as ordinary income. The taxpayer is only required to recognize § 1245 recapture ordinary gain equal to the lower of the depreciation taken or the gain recognized. Rowing machine:Realized and recognized gain = Amount realized - Adjusted basis of machine on date of sale = $4,900 - $0 = $4,900.Section 1245 recapture = Amount of depreciation claimed ($5,200) or gain recognized ($4,900), whichever is less = $4,900. d. Answers: § 1231 gain; $175,217; $0; $25,217. Section 1250 recapture rarely applies, since only the amount of additional depreciation is subject to recapture. To have additional depreciation, accelerated depreciation must have been taken on the asset. Additional depreciation is the excess of the accelerated depreciation actually deducted over depreciation that would have been deductible if the straight-line method had been used. Under § 1250, when straight-line depreciation is used, there is no § 1250 recapture potential (unless the property is disposed of in the first year of use). Unrecaptured § 1250 gain (25% gain) is some or all of the § 1231 gain that is treated as long-term capital gain and relates to a sale of depreciable real estate. The maximum amount of this unrecaptured § 1250 gain (25% gain) is the depreciation taken on real property sold at a recognized gain. Apartment building:Realized gain = Amount realized - Adjusted basis = $300,000 - $124,783 = $175,217. Section 1231 gain recognized = $175,217. No § 1250 recapture is recognized because the taxpayer used the straight-line method of depreciation. Of the $175,217 § 1231 gain, $25,217 is unrecaptured § 1250 gain because the depreciation taken of $25,217 ($150,000 cost - $124,783 basis) is less than the $175,217 recognized gain. e. Answers: loss; $7,100; nondeductible personal casualty loss. Section 1231 may also apply to involuntary conversions of capital assets. Because an involuntary conversion is not a sale or exchange, such a disposition normally would not result in a capital gain. However, personal use property casualty gains and losses are not subject to the § 1231 rules. If the result of netting these gains and losses is a gain, the net gain is a capital gain. If the netting results in a loss, the net loss is a deduction from AGI to the extent it exceeds 10 percent of AGI. Yacht:Personal use property casualty loss = Fair market value at date of theft − Insurance proceeds = $19,600 − $12,500 = $7,100. Personal use property casualty losses are not deductible unless they offset personal use property casualty gains and/or are losses arising in a Federal disaster area. As a result, the loss on the yacht is not deductible. f. Answers: loss; $11,200; nondeductible personal loss. Auto:Realized loss = Amount realized - Adjusted basis = $9,600 - $20,800 = $11,200. The loss relates to a personal use asset. Therefore, it is not recognized. g. Answers: loss; $6,000; business casualty loss. Nonpersonal use capital asset disposed of by casualty may get § 1231 treatment or ordinary treatment, but it will not get capital gain or loss treatment. If the result is a net loss, the § 1231 casualty gains and the nonpersonal use capital asset casualty gains are treated as ordinary gains, the § 1231 casualty losses are deductible for AGI, and the nonpersonal use capital asset casualty losses are deductible from AGI. If the result of the netting is a net gain, the net gain is treated as a § 1231 gain. Thus, a § 1231 asset disposed of by casualty may or may not get § 1231 treatment, depending on whether the netting process results in a gain or a loss. Trampoline stretching machine:$6,000 business casualty loss is deductible for AGI. The casualty loss is measured by the adjusted basis of the property at the time of the theft. There is no $100 or 10% of AGI floor for a business casualty. h. Answer: $254,617 LOOK AT SCREENSHOTS CH14

On June 1, 2018, Father sold land to Son for $300,000. Father reported the gain by the installment method, with the gain to be spread over five years. In May 2020, Son received an offer of $400,000 for the land, to be paid over three years. a. Classify the following as "True" or "False" regarding the tax consequences of the Son's sale. a. Son is not allowed to use the installment sale method for the 2020 transaction. b. Son must realize any of Father's unrealized gain in 2020. c. Father must accelerate the reporting of the installment sale gain. d. Because the sale occurred before June 1, 2020, related-party rules apply. b. How could the tax consequences be improved? If Son's sale occurred after _________ , 2020, Father _____________

a. False. Son is allowed to recognize his own realized gain by the installment method. b. False. Son does not realize any of Father's unrealized gain. However, this is a related-party transaction. Therefore, the proceeds from the subsequent sale (the second sale) by the Son are treated as though they were used to pay the installment note due to the Father (the first sale). c. True. Son's sale would occur within two years of the date on which he purchased the land. Therefore, Father must treat payments received by Son as if received by him and accelerate his reporting of the installment sale gain. d.True. If Son's sale occurred after June 1, 2020 (more than two years after the date on which he purchased the land from Father), the related-party rules would not apply and Father could continue to report his gain as collections are received from Son. B. Answers: June 1; could continue to report his gain as collections are received from Son. If Son's sale occurred after June 1, 2020 (more than two years after the date on which he purchased the land from the Father), the related-party rules would not apply, and the Father could continue to report his gain as collections are received from Son. ch16

What is the basis of the new property in each of the following exchanges? a. Apartment building held for investment (adjusted basis of $145,000) for office building to be held for investment (fair market value of $225,000)._______ b. Land and building used as a barbershop (adjusted basis of $190,000) for land and building used as a grocery store (fair market value of $350,000).________ c. Office building (adjusted basis of $45,000) for bulldozer (fair market value of $42,000), both held for business use.________ d. IBM common stock (adjusted basis of $20,000) for ExxonMobil common stock (fair market value of $28,000)._________ e.Rental house (adjusted basis of $90,000) for mountain cabin to be held for rental use (fair market value of $225,000).__________ f.General partnership interest (adjusted basis of $400,000) for a limited partnership interest (fair market value of $580,000).___________

a.Apartment building held for investment (adjusted basis of $145,000) for office building to be held for investment (fair market value of $225,000). $145,000. Because the postponed gain is $80,000, the basis equals $145,000 ($225,000 - $80,000). b.Land and building used as a barber shop (adjusted basis of $190,000) for land and building used as a grocery store (fair market value of $350,000). $190,000. Because the postponed gain is $160,000, the basis equals $190,000 ($350,000 - $160,000). c.Office building (adjusted basis of $45,000) for bulldozer (fair market value of $42,000), both held for business use. $42,000. The transaction does not qualify as a like-kind exchange. Therefore, the basis of the newly acquired asset is equal to its fair market value, or $42,000. d.IBM common stock (adjusted basis of $20,000) for ExxonMobil common stock (fair market value of $28,000). $28,000. The transaction does not qualify as a like-kind exchange. Therefore, the basis of the newly acquired asset is equal to its fair market value, or $28,000. e.Rental house (adjusted basis of $90,000) for mountain cabin to be held for rental use (fair market value of $225,000). $90,000. The transaction does qualify as a like-kind exchange. Therefore, the basis of the rental use mountain cabin is equal to its fair market value reduced by the postponed gain, or $90,000 ($225,000 - $135,000). f.General partnership interest (adjusted basis of $400,000) for a limited partnership interest (fair market value of $580,000). $580,000. The transaction does not qualify as a like-kind exchange. Therefore, the basis for the limited partnership interest is its fair market value of $580,000. CH13

Select the accounting method that the taxpayers are allowed to use in the following businesses. a. A gift shop with average annual gross receipts of $900,000. b. An accounting partnership with average annual gross receipts of $12,000,000. c. A drywall subcontractor who works on residences and records annual gross receipts of $3,000,000. d. An incorporated insurance agency with average annual gross receipts of $28,000,000. e. A sole proprietor operating a retail clothing store with average annual gross receipts of $12,000,000. f. A sole proprietor operating a widget manufacturing plant with average annual gross receipts of $27,000,000.

a.Modified Cash but cash for recognizing sales. Inventories are an income-producing factor for the gift shop. Because the gift shop's average annual gross receipts is $26,000,000 or less, it can use the cash method to recognize sales, but generally the cost of merchandise is deducted the later of the date of sale or the date the gift shop pays for the goods. b.Cash. The accounting firm can use the cash method and should use that method so that its income from accounts receivable will be deferred until they are collected. c.Cash or Completed Contract. The dry wall contractor is a small business eligible to use the cash method. Note that the completed contract method also is available and would defer the income until the contract is completed. This may produce a better result than the cash method, if the contractor collects on the contract while the contract is in progress. Thus, whether the cash method or completed contract method should be used depends upon the pattern of collection and spending on the contract. d.Accrual. The insurance agency is not a professional services corporation, and its annual gross receipts exceed $26,000,000; therefore, this C corporation is required to use the accrual method of accounting. e. Cash. This retailer is a sole proprietor, so it is not subject to the accrual method rule of § 448. Also, assuming that it has average annual gross receipts in the prior three-year period of $26,000,000 or less, it is not required to account for inventory or use the accrual method per § 471(c). Options for accounting for the inventory include reporting it as nonincidental supplies or, if the proprietor does not have an applicable financial statement, deducting it when purchased (and paid for) if this method is used for the retailer's books. f.Accrual. A sole proprietor (individual) is not subject to the accrual method rule of § 448. However, this business has inventory and average annual gross receipts in the prior three-year period in excess of $26,000,000. Per § 471(c), inventory must be accounted for and the accrual method must be used per Reg. § 1.446-1(c)(2). ch16