ACCY 269
The Section 1231 look-back rule indicates that when a taxpayer recognizes a net Section 1231 gain for a year, the taxpayer must look-back to the -year period preceding the current year to determine if there are any unrecaptured Section 1231 losses. If there are losses, the Section 1231 gain in the current year must be recharacterized as to the extent of the unrecaptured loss.
5, ordinary income
Section 179 expensing, bonus depreciation, and MACRS depreciation rates are available for listed property if its business-use percentage exceeds %.
50
additional recapture for corporations
Although depreciation recapture is generally the same for all taxpayers, corporate taxpayers that sell depreciable real estate face an additional amount of depreciation recapture (§291). - §291 required recapture of 20% of the excess of the amount that would be recaptured under §1245 (had §1245 applied) over the amount actually recaptured under §1250
Which of the following assets qualifies as residential rental property? (Check all that apply.) Multiple select question. Office building leased to businesses Hotels and motels Apartment building Duplex rented to individuals and families Shopping mall space rented to shops/stores Single-family rental homes
Apartment building Duplex rented to individuals and families Single-family rental homes
Which of the following assets are classified as Section 1231 assets? (Check all that apply.) Multiple select question. Apartment buildings held more than a year A machine held more than a year that is used in a trade or business Inventory sold in a trade or business that was purchased within the last two months Equipment used in a trade or business that was purchased within the last six months Land held more than a year for investment purposes Land held more than a year that is used in a trade or business
Apartment buildings held more than a year A machine held more than a year that is used in a trade or business Land held more than a year that is used in a trade or business
Which of the following items are needed to calculate MACRS depreciation for an asset? (Check all that apply.) Multiple select question. Asset's expected usefulness Applicable depreciation convention Asset's condition or age Asset's depreciable basis Applicable depreciation method Applicable recovery period Date placed in service
Applicable depreciation convention Asset's depreciable basis Applicable depreciation method Applicable recovery period Date placed in service
Bourne Guitars, a corporation, reported a $157,000 net §1231gain for year 6. Assuming Bourne reported $50,000 ofnonrecaptured net §1231 losses during years 1-5, whatamount of Bourne's net §1231 gain for year 6, if any, is treatedas ordinary income?- Assuming Bourne's nonrecaptured net §1231 losses from years 1-5were $200,000, what amount of Bourne's net §1231 gain for year 6, ifany, is treated as ordinary income?
50,000 157,000
700,000
50,000 loss and 1231 loss
Mark's Markers purchased a building and land for $750,000. An appraisal determined that two-thirds of the cost should be attributed to the building and one-third should be attributed to the land. Consequently, Mark's Markers will use a cost basis of $500000Blank 1Blank 1 500000 , Correct Unavailable for the building and $250000Blank 2Blank 2 250000 , Correct Unavailable for the land.
500,000 250,000
Mandy inherited stock upon the death of her uncle. Mandy's uncle had only owned the stock for 6 months before he died. He had a basis of $6,000 in the stock. At the date of death, the stock was valued at $6,800. Mandy sold the property three months after receiving it from the estate. What is the amount of Mandy's basis in the stock and her holding period?
Basis = $6,800; Long-term holding period
Why is the treatment of Section 1231 gains and losses for individual taxpayers more advantageous than the treatment of gains and losses from other assets?
Because the gains receive preferential tax rates, while the losses are fully deductible rather than restricted
Huey sold a warehouse with an original cost of $150,000 for $230,000 to an S corp where he owns a 51% interest. The S corp will use the warehouse in the business. The warehouse had accumulated depreciation of $40,000. Assuming no other asset sales during the year, how will the gain be taxed to Huey?
$120,000 - ordinary income
Harry received 100 shares of stock from his aunt as a gift. Harry's aunt purchased the stock 10 years ago for $20 per share. The stock was worth $50 per share on the date Harry received the gift. Harry sold the stock for $60 per share. What is the amount of Harry's basis in the stock?
$2000 because it is a gift the basis is the og purchase if it was an inheritance it would be the FMV
Tom purchased a 7-year asset for his business in February, three years ago, at a cost of $4,500. It is being depreciated using the half-year convention for MACRS. He did not deduct any bonus depreciation and or take a Sec. 179 expense in the year of purchase. The asset was sold in April of year 4. How much depreciation will Tom deduct for the asset in year 4?
$281
Pixie's Pizza House, a calendar year corporation, purchased a delivery truck in February for $15,000 (no other assets were purchased that year). How much depreciation will be taken on the truck in the current year if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation?
$3,000
Nancy sold three capital assets that were held for investment. She sold stock in ABC Corporation for a gain of $10,000; stock in XYZ Corporation for a gain of $2,000; and corporate bonds for a loss of $20,000. Assuming all of the investments had a long-term holding period, how will the transactions be treated for tax purposes?
$3,000 deduction against ordinary income with a $5,000 capital loss carried forward to offset income for next year
Ethan's Eggroll House, a calendar year corporation, purchased a new computer and printer in January for $1,500. In February, the business purchased a new oven for $1,200. No other assets were purchased during the year. How much depreciation will be taken on these items in the current year if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation?
$300 computer; $171 oven 1500 x .20 1200 x .1429
Rex's Wrecks purchased $1,650,000 in new equipment (7 year property) during 2022. Rex wants to use Section 179 to expense the maximum amount of the purchase. Assuming no limitations due to net income restrictions, Rex can expense $ under Sec. 179, $ in bonus depreciation, and $ in regular MACRS depreciation (rounded to the nearest dollar).
1,080,000 the maximum 570,000 the remainder left x 100% deduction 0 because there is nothing left
During the 2022 tax year, businesses may elect to immediately expense up to $ of tangible property placed in service that year under Section 179. For any assets that are completely or partially expensed, the company must reduce the of the asset before computing MACRS depreciation expense.
1,080,000, qualified, basis
b. If Woolard elects the maximum amount of §179 for the year, what is the amount of deductible §179 expense for the year? What is the total depreciation that Woolard may deduct in 2022? What is Woolard's §179 carryforward amount to next year, if any?
1,198,000 - 1,080,000 = 118,000 x 14.29% = 16,862 240,000 - 16,862 = 223,138 deductible 179 expense total depreciation deduction 240,000 179 carryforward 1,080,000 - 223,138 = 856862
Woolard Supplies (a sole proprietorship) has taxable income in 2022 of $240,000 before any depreciation deductions (§179, bonus, or MACRS) and placed some office furniture into service during the year. The furniture does not qualify for bonus depreciation. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) Note: Do not round intermediate calculations. Round your intermediate calculations and final answers to the nearest whole dollar amount. AssetPlaced In ServiceBasisOffice furniture (used)March 20$ 1,198,000 Problem 10-62 Part a (Algo) a. If Woolard elects $50,000 of §179, what is Woolard's total depreciation deduction for the year?
1,198,000 - 50,000 = 1,148,000 x 14.29% = 164,049.2 +50,000
Randy owns and rents a residential duplex that he purchased 17 years ago in the month of May. The purchase price was $250,000. During August of the current year, Randy sold the duplex. What is the amount of depreciation that can be deducted in the current year (Rounded to the nearest dollar)?
1. 250,000 x 3.637% = 9,175 2. 8 month - .5 =7.5 3. 7.5 / 12 4. 9,175 x (7.5/12) =5,743.375 which is wrong it was 5,681
netting section 1231 gains and losses in order
1. apply the depreciation recapture and 1239 rules to 1231 assets sold at a gain 2. combine 1231 gains and losses 3. treat a 1231 net loss as ordinary and apply the 1231 look-back rule to a net gain
Match the maximum preferential rate for individual taxpayers with the type of asset subject to that particular rate. 20 25 28
20 - net capital gains on assets held more than one year 25- unrecptured 1250 gains on real property held more than one year remaining after the netting process are taxed on a maximum rate of 25% 28 - net gains on collectibles held for more than a year and qualified small business stock are taxed at a maximum rate
Mario transferred real estate with an adjusted basis of $140,000 for similar real estate with a fair market value of $160,000. The exchange qualified as a like-kind exchange. The realized gain on the exchange was . The recognized gain on the exchange was $. Mario's adjusted basis in the real estate received is
20,00 0 140,000
Mario transferred a building with an adjusted basis of $140,000 for a similar building with a fair market value of $100,000 and cash of $60,000. The exchange qualified as a like-kind exchange. The realized gain on the exchange was $. The recognized gain on the exchange was $. Mario's adjusted basis in the building received is $
20,000 20,000 100,000
Sandy sold 2 acres of land to her daughter, Tara. Sandy's basis in the land was $800 and she sold the land for $500. After owning the land for a year, Tara sold it to an unrelated party for $1,000. Tara's recognized gain on the sale of the land is $
200
Lester sold a warehouse and a forklift. The warehouse sold for $230,000. It had an original cost of $150,000 and accumulated depreciation of $40,000. The forklift sold for $4,000. It had an original cost of $15,000 and accumulated depreciation of $14,000. Lester has $2,000 in unrecaptured Section 1231 losses from last year and a marginal tax rate of 32%. Assuming no other asset sales, Lester will be taxed on $ at 32%, $ at 25%, and $ at 15
5000 40,000 78,000
b. How much will John accumulate after taxes if he contributes to a traditional IRA (consider only the funds contributed to the traditional IRA)?
5000 x 5.743 = 28,717.50 28,717.50 x .28 = 8040.9 28,717.50 - 8040.9 = 20677
Angie's Cupcake Shop bought 7-year property furniture in February of Year 1 and sold it in May of Year 3. The original cost of the furniture was $8,200. Assuming Angie is using the MACRS half-year convention for the furniture, her depreciation deduction in the year of sale will be $
8200 x 17.49% / 2
Basis for cost recovery
Additional costs associated with an asset after the asset has been placed in service. - Routine maintenance: immediately deducted • Costs related to the replacement of damaged or worn parts with comparable and commercially available replacement parts arising from inspecting, cleaning, and testing of the property are immediately deductible when the taxpayer fully expects to perform the activity more than once during a 10-year period (for buildings and structures related to buildings), or more than once during the property's class life(for property other than buildings) .- Costs that result in a "betterment, restoration, or new or different use for the property": capitalized.
de minimis safe harbor
Allows taxpayers to immediately deduct low-cost personal property items used in the business • If taxpayers have an applicable financial statement: up to $5,000 per invoice or item • If taxpayers don't have an applicable financial statement: up to$2,500 per invoice or item
Zack received a gift of stock from his uncle two years ago. Zack's uncle had a basis in the stock of $4,000, but the fair market value of the stock on the date it was given to Zack was only $1,500. Zack held the stock until this year and just sold it for $4,200. What basis in the stock will Zack use to determine his gain or loss on the sale of the stock?
4000 split rule selling price > og basis take the carryover basis
Which of the following types of defined contribution plans will most likely involve an employer matching the employee contributions to some degree? Multiple choice question. 401(k) plans Traditional pension plans Money purchase plans Profit sharing plans
401(k)
Randy rents commercial warehouses to various businesses. He purchased a warehouse in May of the current year. The cost of the warehouse was $250,000. The depreciation for the current year will be $. If Randy continues to rent the warehouse for the next 40 years, the depreciation in the 40th year he owns the warehouse will be $. (Round your answers to the nearest whole dollar.)
4013, 2408 (may to may)
Baker received $450,000 in insurance proceeds and spent $400,000 rebuilding the building during the current year.
450,000 - 250,000 = 200,000 realized gain 50,000 recognized gain value of replacement property 400,000 - 150,000= 250,00
natural resource depletion rates
5 percent - gravel, pumice, and stone 14 percent - asphalt rock, clay and other metals 15 percent - gold, copper, oil shale, and silver, domestic oil and natural gas 22 percent - platinum, uranium, and titanium
Cost Recovery
Businesses capitalize the cost of assets with a useful life of more than one year rather than expense the cost immediately. .• Businesses are allowed to use various methods to allocate the cost of these assets over time because the assets are subject to wear, tear, and obsolescence .• The method of cost recovery depends on the nature of the underlying asset.
Mindy's Marble Shop has a net Section 1231 gain in the current year of $18,000. In the previous five years, there are $13,000 in unrecaptured Section 1231 losses. How will Mindy's gain be taxed in the current year?
Due to the unrecaptured losses, $13,000 will be recharacterized as ordinary income, and $5,000 will be characterized as long-term capital gain.
Which of the following nontaxable fringe benefits have a maximum dollar amount that is NOT subject to tax? (Check all that apply.) Multiple select question. Employee educational assistance No-additional-cost services Employer-paid health insurance premiums Qualified transportation fringe benefits Dependent care benefits
Employee educational assistance Qualified transportation fringe benefits Dependent care benefits
Why is land considered to be a pure Section 1231 asset?
Land is not subject to depreciation.
Which of the following is NOT considered a start-up cost of a business?
Legal fees to draft original organizational documents
Which of the following assets has a 5-year recovery period for MACRS depreciation?
Light general-purpose trucks
Listed property
Listed Property: business assets that tend to be used for both business and personal purposes- Examples: automobiles, planes, boats, and digital cameras • The tax law limits the allowable depreciation on listed property to the portion of the asset used for business purposes. - If the business-use percentage for the year > 50% • The deductible depreciation is limited to the full annual depreciation multiplied by the business-use percentage for the year. • Eligible for the §179 expensing election and bonus depreciation (limited to the business-use percentage)- If the business-use percentage for the year <=50% • The business must compute depreciation for the asset using the MACRS straight-line method over the MACRS ADS recovery period -if a business intially uses an asset more than 50% of the time for business but subsequently its business use drops to 50% or below, the depreciation expense for all prior years must be recomputed as if the business has been using the straight line depreciation over the ADS recovery period the entire time
Which of the following choices describes the tax treatment of capital losses as they apply to individuals? (Check all that apply.) Multiple select question. No offset against ordinary income Losses carried forward indefinitely, but not carried back Net capital losses carried back three years and forward five years Can be used to fully offset capital gains May annually deduct up to $3,000 of net capital losses against ordinary income
Losses carried forward indefinitely, but not carried back Can be used to fully offset capital gains May annually deduct up to $3,000 of net capital losses against ordinary income
luxury automobiles
Luxury Automobiles• Taxpayers placing automobiles into service during the year determine depreciation for the automobiles by first computing regular MACRS depreciation and then comparing it to the maximum depreciation amount for the first year of the recovery period. - Taxpayers are allowed to deduct the lesser of the two - Each subsequent year, taxpayers should compare the regular MACRS amount with the limitation amount and deduct the lesser of the basic MACRS depreciation or the limitation. • Automobiles to which the depreciation limits apply are commonly referred to as luxury automobiles. - The luxury automobile limitation doesn't apply to vehicles weighing more than 6,000 pounds and those that charge for transportation, such as taxicabs and limousines. It also excludes delivery trucks and vans.
like-kind exchanges timing requirements
Many times, a simultaneous exchange may not be practical or possible. - Taxpayers often use third-party intermediaries to facilitate like-kind exchanges. - Two timing rules• The taxpayer must identify the like-kind replacement property within 45 days after transferring the property given up in the exchange and • The taxpayer must receive the replacement like-kind property within 180 days (or the due date of the tax return including extensions) after the taxpayer initially transfers property in the exchange.
In order to avoid a penalty for early distributions of a defined contribution plan, an employee can NOT take a withdrawal from the account before he meets which of the following age requirements? (Check all that apply.) Multiple select question. 59 1/2 years of age 65 years of age 72 years of age Age is irrelevant if he is retired and has had the account for more than five years 62 years of age 55 years, if he has separated from employment
Multiple select question. 59 1/2 years of age 55 years, if he has separated from employment
Which of the following statements is correct regarding the sale of Section 1231 assets? Multiple choice question. Net Section 1231 gains are taxed as ordinary income at the taxpayer's marginal rate. Any gain from Section 1231 assets is taxed as a short-term capital gain. Net Section 1231 losses are treated as capital losses with the deductibility subject to restrictions. Net Section 1231 losses are fully deductible against all types of income.
Net Section 1231 losses are fully deductible against all types of income.
How are net Section 1231 gains and losses treated for tax purposes?
Net gains are treated as long-term capital gains and net losses are treated as ordinary losses
like-kind exchanged solely for like-kind property
No gain or loss is recognized on the exchange.- Taxpayers establish or receive a substituted basis in the like-kindproperty they receive. (i.e., They exchange the basis they have in theproperty they are giving up and transfer it to the basis of the propertythey are receiving.)
Dispositions
No matter how it is accomplished, every asset disposition triggers a realization event for tax purposes. • To calculate the amount of gain or loss taxpayers realize when they sell assets, they must determine the amount realized on the sale and the adjusted basis of each asset they are selling. amount realized = cash received +FMV of other property + buyer's assumption of liabilities - seller's expense adjusted basis = initial basis - cost recovery allowed (allowable)
calculating net 1231 gains or losses
Once taxpayers determine the amount and character of gain or loss, they recognize on each §1231 asset they sell during the year (i.e., recharacterize §1231 gain as ordinary income under the §1245 and §291), the remaining §1231 gains and losses are netted together. - A portion of the §1231 gains may include unrecaptured §1250 gains that are taxed at a maximum of 25%. When netting, the losses first offset regular §1231 gains before offsetting unrecaptured §1250 gains
bonus depreciation
The TCJA increased the bonus depreciation percentage to 100% for qualified property acquired after 09/27/2017. • Bonus depreciation is mandatory for all taxpayers that quality. - Taxpayers may elect out of bonus depreciation (on a property class basis) by attaching a statement to their tax return indicating they are electing not to claim bonus depreciation .• Election made annually. • For taxpayers claiming the deduction, bonus depreciation is calculated after the §179 expense but before regular MACRS depreciation.
When an individual taxpayer sells depreciable real property used in a business for an amount that exceeds its original cost/original basis, how is the gain taxed?
The gain due to accumulated depreciation is taxed at a max rate of 25%. The remaining gain is taxed at 0/15/20%, depending on the taxpayer's income.
Section 1245 Recapture
The gain from the sale of §1245 property is characterized as ordinary income to the extent the gain was created by depreciation or amortization deductions. .- The amount of ordinary income (§1245 depreciation recapture) taxpayers recognizes when they sell §1245 property is the lesser of: • Recognized gain on the sale or • Total accumulated depreciation (or amortization) on the asset .- The remainder of any recognized gain is characterized as §1231 gain.
Drake purchased a second home this year. He lived in the home for 12 days and rented the home for 70 days. Which of the following statements is correct? Multiple choice question. The home is a residence. Drake used the home for the lesser of 14 days or 10% of the rental days. The home is a residence because Drake lived in the house for more than 10% of rental days. The home is NOT a residence. Drake did not use the residence for more than the greater of 14 days or 10% of rental days.
The home is NOT a residence. Drake did not use the residence for more than the greater of 14 days or 10% of rental days.
Mark's Markers purchased a building and land for $750,000. How should Mark's Markers account for the purchase?
The land and building must be treated as separate assets with a portion of the total cost allocated to each of the assets.
Janet owns land that she uses in her business. Which of the following statements is correct regarding the land?
The land is classified as real property, but it can NOT be depreciated, even though it is a business asset.
When a gain results from the sale of Section 1245 property, how does the taxpayer determine the amount that should be taxed as ordinary income?
The lesser of the recognized gain or the accumulated depreciation on the asset is ordinary income. Need help? Review these concept resources.
Basis for cost recovery
When assets are converted from personal to business use - The basis for cost recovery purpose is the lesser of (1) the cost basis of the asset or (2) the fair market value of the asset on the date of conversion to business use .• When assets are acquired through a tax-deferred transaction (e.g., a like-kind exchange) - Generally, these assets take the same basis the taxpayer had in the property that the taxpayer transferred in the transaction. Assets acquired by gift have a carryover basis. (Special dual basis rules will be discussed in Chapter 11.) • Assets acquired through inheritance generally receive a basis equal to the fair market value on the transferor's date of death.
When does a business have to use the mid-quarter convention?
When more than 40% of the tangible personal property purchased is placed in service during the fourth quarter of the year
Section 1231 Assets
When taxpayers sell multiple §1231 assets during the year, they combine or "net" their §1231 gains and §1231 losses together .- If the netting results in a net §1231 gain, the net gain is treated as a LTCG. - If the netting results in a net §1231 loss, the net loss is treated as an ordinary loss .• §1231 gains on individual depreciable assets may be recharacterized as ordinary income under the depreciation recapture rules
Shontelle received a gift of income-producing property with anadjusted basis of $49,000 to the donor and FMV of $35,000 onthe date of gift. No gift tax was paid by the donor. Shontellesubsequently sold the property for $31,000. What isShontelle's recognized gain or loss?
applying dual basis so FMV 35,000 - 31,000 =(4,000)
Nondeductible contributions to a traditional IRA Blank______. Multiple choice question. are subject to the same earned income limitations as deductible contributions may not be made to a spousal IRA can be made without need of earned income may be made for the same amount as deductible contributions, effectively allowing taxpayers to double their total contribution
are subject to the same earned income limitations as deductible contributions
Which of the following assets are generally referred to as listed property? (Check all that apply.) Multiple select question. Digital cameras Manufacturing equipment Automobiles Office desk Office furniture
automobiles, digital cameras,
Pheasant, Inc., made the following exchanges during the taxable year .a) Inventory for a machine used in business b) Land held for investment for a building used in business c) Stock held for investment for equipment used in business d) A light-duty business truck for a light-duty business truck e) Land held for investment in New York for land held for investment in London Which of the above qualifies as an exchange of like-kind property?
b -cannot be personal property, or in another country
Contributions to a traditional 401(k) are made with -tax dollars, while contributions to a Roth 401(k) are made with -tax dollars. Qualified distributions from a Roth 401(k) are (taxable/nontaxable). (Enter only one word per blank.)
before, after , not taxable
Contributions to traditional defined contribution plans can be made with -tax dollars, which reduces the overall cost because of the tax on the contribution.
before, savings, deduction, benefit, saving
b. Javier works for DNL for three years and three months before he leaves for another job. Javier's annual salary was $55,000, $65,000, $70,000, and $72,000 for years 1, 2, 3, and 4, respectively. DNL uses a seven-year graded vesting schedule.
benefit = 6% x avg of highest years of full compensation 55,000+65,0000 + 70,0000 / 3 = 63,333.33 before-tax annual benefit = 4.5% x 63,333.33 x 20% = 760
The employee bears the investment risk and funding responsibility in a defined plan.
contribution
Section 291 depreciation recapture for corporations provides that what portion of the gain on depreciable real property will be recognized as ordinary income?
corporations selling depreciable real property recapture as ordinary income 20 percent of the lesser of 1. the recognized gain or 2. the accumulated depreciation
The cost recovery of the capital investment in natural resources is referred to as
depletion
Match the method of cost allocation to the nature of the asset being expensed over a specific time period. DEPRECITATION AMORTIZATION DEPLETION
depreciation - personal property, real property amortization intangible assets natural resources - depletion
For defined contribution plans, the employee is immediately vested in the (employee/employer) contributions and any earnings on those contributions. The remaining funds may become vested over time. The most restrictive schedule for this process is either a -year "cliff" or a -year graded schedule
employee, three, six
The maximum contribution that a taxpayer can make into a Roth IRA is Blank______the allowable contribution for a traditional IRA.
equal to
Straight-line depreciation is mandatory and Section 179 expensing is NOT eligible for listed property when the business-use is Blank______50%.
equal to or less than
The bargain element is equal to the difference between the price and the fair value of the acquired shares on the date of exercise.
exercise, market
True or false: A taxpayer will use the luxury automobile limitations for depreciation in the year the car is purchased, then the regular MACRS depreciation percentages will be applied for the remaining recovery periods.
false
True or false: Once the entire cost of a resource has been recovered, the business is NOT allowed to continue deducting depletion expense for the resource.
false
True or false: One difference between traditional IRAs and Roth IRAs is that there is no phase-out based on AGI for contributions to a Roth IRA.
false
True or false: The cost of marketing or selling stock qualifies as an organizational expenditure and is amortized over 180 months.
false
True or false: When §197 does not apply, patents or copyrights should be amortized over their legal lives.
false
rue or false: A loss on a sale to a related party can only be recognized if the fair market value of the asset on the date of the sale can be objectively ascertained.
false
True or false: In order to calculate MACRS depreciation, the business only needs to know the asset's depreciable basis, the recovery period, and which depreciation method (i.e. 200% declining balance) is used.
false asset's depreciable basis, the date it was placed in service, the applicable depreciation method, the asset's recovery period ,, and the applicable depreciation convention,
True or false: Depreciation recapture changes the character of the gain or loss on a Section 1231 asset from capital to ordinary.
false it only applies to gains
True or false: The loss on the sale of a principal residence is classified as a deductible capital loss.
false not deductible
If only one spouse is an active participant in an employer sponsored retirement plan, the non-participating spouse can maximize his or her allowed IRA deduction by choosing the married filing separately status.
false Reason: Under these conditions, choosing the married filing separately status will prohibit a deduction for either spouse if MAGI is $10,000 or more. The phase-out is much less restrictive when filing jointly.
Which one of the following assets is generally NOT referred to as listed property?
filing cabinet
The phase-out for contributions allowed to Roth IRAs is dependent upon the taxpayer's and MAGI. (Enter only
filing status
In which accounting area(s) is an asset's estimated useful life determined by the taxpayer's assessment, rather than being predetermined based on asset type?
financial accounting only tax purposes are determined by the IRS
Buckley, an individual, began business two years ago and has never sold a §1231 asset. Buckley has owned each of the assets since he began the business. In the current year, Buckley sold the following business assets: AssetOriginal CostAccumulated DepreciationGain/LossComputers$ 6,000$ 2,000$ (3,000)Machinery10,0004,000(2,000)Furniture20,00012,0007,000Building100,00010,000(1,000) Assuming Buckley's marginal ordinary income tax rate is 32 percent, answer the questions for the following alternative scenarios: a1. What is the amount and character of Buckley's gains or losses for the current year? a2. Calculate Buckley's tax liability or tax savings for the year.
find the paper
b1. Assume that the amount realized increased so that the building was sold at a $6,000 gain instead. What is the amount and character of Buckley's gains or losses for the current year? b2. Calculate Buckley's tax liability or tax savings for the year.
find the paper
c1. Assume that the amount realized increased so that the building was sold at a $15,000 gain instead. What is the amount and character of Buckley's gains or losses for the current year? c2. Calculate Buckley's tax liability or tax savings for the year.
find the paper
realized gain/loss on disposition
gain/loss realized = amount realized - adjusted basis Realized Gain or Loss on Disposition - As a general rule, taxpayers realizing gains and losses during a year must recognize the gains or losses .• Recognized gains or losses are gains (losses) that increase(decrease) taxpayers' gross income .- In certain circumstances, taxpayers may be allowed to defer recognizing gains to later periods, or they may be allowed to permanently exclude the gains from taxable income .• Some losses may be required to be deferred or permanently disallowed
Which of the following items are classified as Section 197 intangibles? (Check all that apply.) Multiple select question. Goodwill Covenants not to compete Trademarks Start-up costs
goodwill, covenants not to compete, trademarks, patents, customer lists
For both incentive stock options and nonqualified stock options, there are no tax consequences on either the date or the date.
grant and vesting the only date that has tax consequences is exercise date
By making a Section 83(b) election, the employee is taxed on the value of the restricted stock on the date, rather than the date.
grant, vesting
In years where many new assets are purchased, regular tax depreciation will be (greater/less) than AMT depreciation, resulting in an (addition/subtraction) of the difference to regular taxable income to arrive at the AMT tax base.
greater, addition
The calculation for the amount of percentage depletion for a natural resource is determined by multiplying the from the resource extraction by a fixed percentage based on the type of natural resource.
gross income
The amount of gain on an installment sale recognized each year is calculated by multiplying the by the installment payment received.
gross profit percentage
The - convention allows 50% of a full year's depreciation in the year the asset is placed in service, regardless of when it was actually placed in service.
half, year
The acronym IRA refers to a(n) which has tax characteristics similar to employer sponsored plans.
individual retirement account 401(k)
adjusted basis
initial basis - cost recovery deductions
A(n) is any sale of property where the seller receives at least one payment in a taxable year subsequent to the year of disposition of the property.
installment sale
A third-party intermediary can facilitate a like-kind exchange. The taxpayer transfers the like-kind property to the who then sells the property and purchases like-kind property to transfer to the taxpayer.
intermediary,
The amount of Section 1245 depreciation recapture that will be taxed as ordinary income is the of (1) the recognized gain on the sale or (2) total accumulated depreciation on the asset. The remainder of any gain is characterized as Section gain, which may be taxed at
lesser, 1231
If a taxpayer sells property to a related party, any resulting from the transaction is NOT recognized for tax purposes.
loss
Hank owns a gym called Ultimate Fitness. During the past year, Hank sold some equipment and other assets to upgrade his facility. He sold an elliptical trainer for $400 cash plus a juicer machine worth $100. The elliptical trainer had an original cost of $1,500 and had accumulated depreciation for tax purposes of $800. What is Hank's realized gain or loss on the sale?
loss 200
Assuming the taxpayer has owned a Roth IRA account for over 5 years, qualifying distributions include a $10,000 distribution Blank______. (Check all that apply.) Multiple select question. used to pay off the 50-year-old taxpayer's delinquent debt made because the taxpayer is disabled made to a beneficiary after the death of the taxpayer made when the taxpayer was 60 years old used to pay college tuition for the taxpayer's daughter used for a first-time home purchase
made because the taxpayer is disabled made to a beneficiary after the death of the taxpayer made when the taxpayer was 60 years old used for a first-time home purchase
One nice feature of an account such as a 401(k) is that many employers will the employee contributions at a stated percentage of the contribution.
match
When depreciating real property under MACRS, which of the following conventions is used?
mid-month
Assume that on January 30, 2021, Teton acquires a competitor's assets for $350,000. Of the $350,000 purchase price, $125,000 is allocated to tangible assets and $225,000 is allocated to §197 intangible assets (patent, $25,000; goodwill, $150,000; and a customer list with a three-year life, $50,000).What is Teton's accumulated amortization and remaining basis in each of these §197 intangibles after three years?
patent 25,00x 3/15 = 5,000 goodwill 150,000 x 3/15 = 30,000 customer list 50,000 x 3/15 = 10,000 basis 25,000 - 5,000 = 20,000 150,000 - 30,000 = 120,000 50,000 - 10,000 = 40,000
Assets that are created or used in a taxpayer's trade or business or that have been in service for one year or less are referred to as (ordinary/capital) assets.
ordinary
Match the character of the asset with its use and holding period. Instructions Ordinary Sec. 1231 Short-term Capital Long-term Capital
ordinary - asset used in trade or business, held one year or less sec 1231- asset used in trade or business held more than one year short-term capital - asset held for investment or used personally, held one year or less long-term capital - asset held for investment or used personally held more than one year
Account receivable from a customer with terms 2/10, net 30.
ordinary asset
Inventory Avery purchased 13 months ago that is ready to be shipped to a customer.
ordinary asset
Manufacturing machinery Avery purchased earlier this year.
ordinary asset
The amount of depletion that can be taken on an annual basis is the larger of the amounts computed under the depletion method or the depletion method. (Enter only one word per blank.)
percentage, cost
asset and cost recovery
personal property - tangible assets automobiles, equipment, machinery - depreciation real property - buildings / land (land non depreciable) -depreciation intangible assets - nonphysical assets such as goodwill / patents - amortization natural resources - aka oil, coal, timber, and gold -depletion
Match the type of asset with its description. Instructions personal property real property intangible assets natural resouces
personal property - tangible assets such as equipment and machinery real property - buildings and land intangible assets - nonphysical assets natural resources - commodities such as oil, timber, and gold
Business assets that are often used for both and purposes are referred to as listed property.
personal, business,
Which of the following assets is NOT considered to be an ordinary asset?
ordinary assets - generaaly assets created or used in a taxpayer's trade or business aka inventory, ar, machinery, equipment (one year or less) corporate stock in taxpayer's investment portfolio
Upon retirement, all distributions from defined benefit plans are taxable as
ordinary income
When a taxpayer sells property to a related party and the property is depreciable property to the buyer, the gain on the sale is characterized as
ordinary income
Costs of legal services, state fees, and accounting services that relate to creating a business entity and are incurred prior to starting the business are referred to as
organizational expenditures
In order to defer the gain on an involuntary conversion, the taxpayer must reinvest the amount of the from the conversion into replacement property within the prescribed time limit.
proceeds, reimbursementt, money, settlement
Land and buildings are classified as realBlank 1Blank 1 real , Correct Unavailable property, while items such as machinery, equipment, and furnishings are classified as tangible, personal property.
real
Donald owns real estate that he originally purchased in July 2015 for $1,000,000. In 2020, the property has a FMV of $600,000. Donald believes the property will appreciate in value when a proposed shopping mall is built nearby and, therefore, does not want to lose control of it. However ,he has realized a large gain on the sale of a different piece of property and would like to use the unrealized loss related to this parcel of real estate to offset the gain. So at the end of 2020, Donald sells the property to his brother, Ben, for $600,000. In 2022, after the mall is built, Ben sells the land to a developer for $850,000. - Can Donald recognize the loss? - How much gain does Ben recognize on the sale?
realize 600,000 - 1,00,000 = 400,000 he can not recognize this loss due to related persons 850,000 - 600,000 = 250,000 realized gain use 400,00 loss to offset gain
Assume that one of Teton's employees was in a traffic accident whiledriving a delivery van. The employee escaped without serious injury, butthe van was totally destroyed. Before the accident, Teton's delivery van hada FMV of $15,000 and an adjusted basis of $11,000. Teton received $15,000of insurance proceeds to cover the loss. Teton was considering two alternatives for replacing the van: Alternative 1 was to purchase a new delivery van for $20,000 and Alternative 2 was to purchase a used delivery van for $14,000. What gain or loss does Teton recognize under Alternative1 and Alternative 2? • What is Teton's basis in the replacement property it acquired under Alternative 1 and Alternative 2?
realized gain 15,000 - 11,00 = 4,000 alt 1: no gain recognized alt 2: 1,000 gain recognized 20,000 - 4,000 = 16,000 basis 14,000 - 3,000 = 11,000 basis
Baker Corporation owned a building located in Kansas. Baker used the building for its business operations. Last year, a tornado hit the property and completely destroyed it. This year, Baker received an insurance settlement. Baker had originally purchased the building for $350,000 and had claimed a total of $100,000 of depreciation deductions against the property. What are Baker's realized and recognized gain or (loss) on this transaction and what is its basis in the new building in the following alternative scenarios? Note: Leave no answer blank. Enter zero if applicable. Problem 11-62 Part-a (Static) a. Baker received $450,000 in insurance proceeds and spent $450,000 rebuilding the building during the current year.
realized gain 200,000 recognized gain 0 basis of replacement property 250,000
The of depreciation changes the character of the gain on the sale of a Section 1231 asset from a Section 1231 gain into ordinary income.
recapture
If an asset's business use drops to 50%, or below, the business must any excess accelerated depreciation over the depreciation for all prior years.
recapture, straight line
The gain or loss on a property disposition is the amount that increases or decreases a taxpayer's gross income.
recognizes
recovery period for real propery
residential - 27.5 years nonresidential placed in service on or after May 13, 1993 - 39 nonresidential placed in service after dec 31, 1986 but before May 13, 1993 - 31.5 years.
Employees who receive compensation in the form of stock do not have to pay for it, but forfeit ownership if they quit before the date.
restricted, vesting
Marcus is the CEO of publicly traded ABC Corporation and earns a salary of $1,500,000. What is ABC's after-tax cost of paying Marcus's salary?
salary : 1,5000,00 deductible : 1,000,000 marginal tax rate: 21% tax savings from compensation deduction: 210,000 (21% x 1 mil) after tax cost of salary ( 1,500,000 - 210,000) = 1,290,000
The type of compensation where employees receive a fixed amount regardless of the amount of hours worked is called a(n) . The type of compensation that is based on the number of hours worked is called . Both types of compensation are taxed at to employees as income and are subject to tax which includes Social Security and Medicare.
salary, hourly wages, ordinary, FICA
On September 30 of last year, Rex received some investment land from Holly as a gift. Holly's adjusted basis was $50,000 and the land was valued at $40,000 at the time of the gift. Holly acquired the land five years ago. What are the amount and character of Rex's recognized gain (loss) if he sells the land on May 12 this year at the following prices? Note: Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable. Problem 11-37 Part-a (Static) a. Land sold for $32,000
sales price < FMV, the fmv date is used then the holding date starts at the date of the FMV fmv is used if sold at a loss, 40,000 - 32,000 = 8,000 short-term capital loss
b. Land sold for $70,000
sales price > sonor's basis use the carryover basis if sold at a gain, the holding period includes the time of the donor 70,000 - 50,000 = 20,000 long term capital gain
How does the reporting of gains and losses differ between (1) selling property for cash and (2) exchanging property for like-kind property?
taxpayers exchanging property for assets other than cash must defer recognizing gain (or loss) realized on the exchange if they meet certain requirements. In a like-kind exchange, the gain/loss is deferred. In a cash transaction, the gain/loss is recognized immediately.
When a taxpayer makes nondeductible IRA contributions, Blank______.
the earnings grow tax-free until a distribution is received. Upon distribution, only the earnings are taxable, not the contributions
Which type(s) of 401(k) will incur a 10% penalty on the entire distribution if the money is withdrawn early?
traditional
Which type(s) of 401(k) will incur a 50% penalty on the amount of the minimum required distribution if the distribution does NOT occur? Multiple choice question. Roth Traditional Traditional and Roth
traditional and roth
Taxpayers who meet certain eligibility requirements can contribute to IRAs and/or IRAs.
traditional, roth
True or false: Employees prefer to receive ISOs rather than NQOs because any gain on the subsequent sale of the stock may be taxed as a long-term capital gain if the required holding periods are met.
true
True or false: Personal property can be business property or personal-use property.
true
A 40-year old taxpayer has owned a Roth IRA for more than 5 years. A $10,000 distribution will be considered nonqualified if the distribution was Blank______. Multiple choice question. used to pay for higher education expenses made to a beneficiary after the death of the taxpayer made because the taxpayer is disabled used to pay qualifying acquisition costs as a first-time homebuyer
used to pay for higher education expenses
Employees receiving restricted stock are taxed on the fair market value of the shares on the date (absent an election).
vesting
Suppose that Steve's business requires an annual safetycertification on all its equipment and machinery. As a result ofa required inspection of the machinery, Steve finds a defect inthe engine blade (not a major component) of one of hismachines and must replace the engine blade at a cost of$3,000. Can Steve immediately deduct the cost of the newengine blade?
yes
related person loss disallowance
§267(a) disallows recognition of losses on sales to related persons .• Although the loss realized in a related-party sale is not immediately recognized, it may be used to offset any future gain recognized when the property is subsequently sold to an unrelated party. - Any right to offset not used by the subsequent seller to offset some or all of the recognized gain is permanently lost.
amortization - patents and copyrights
• Businesses directly purchasing patents or copyrights (not in an asset acquisition to which §197 applies): amortize the cost over the remaining life of the patents or copyrights • Businesses that create patents or copyrights: amortize the cost or basis of the self-created intangible assets over their legal lives
character of gain or loss - capital assets
• Generally something held for investment for the production of income or for personal use• Capital gains and losses for individuals - discussed in Ch 7 • Capital gains and losses for corporations • Net capital gains taxed at ordinary rates• Net capital losses cannot offset ordinary income (carried back and carried forward)
character of gain or loss - ordinary assets
• Generally, assets created or used in a taxpayer's trade or business (e.g., inventory, accounts receivable) • Other assets used in a trade or business such as machinery and equipment if they have been used in a business for one year or less • Ordinary gain is taxed at ordinary rates • Ordinary loss is deducted against other ordinary income
Way Corporation disposed of the following tangible personal property assets in the current year. AssetDate AcquiredDate SoldConventionOriginal BasisFurniture (7-year)5/12/20187/15/2022HY$ 67,500Machinery (7-year)3/23/20193/15/2022MQ84,500Delivery truck* (5-year)9/17/20203/13/2022HY30,000Machinery (7-year)10/11/20218/11/2022MQ283,000Computer (5-year)10/11/202212/15/2022HY90,000 *Used 100 percent for business. Assume that the delivery truck is not a luxury auto. Calculate Way Corporation's 2022 depreciation deduction (ignore §179 expense
*if an asset is disposed of before it is fully depreciated only one-half of the table applicable depreciation percentage is allowed in the year of disposition half year calculations 67,500 x 8.93 / 2 = 3013.875 furniture 30000 x 19.20 / 2 = 2880 delivery truck *if a business acquires an asset in the same tax year it is not allowed to claim any depreciation on the asset* computer mid quarter calculations 84,500 x 11.97 (the quarter it was of to plus the current yr) =10,114.65 x 12.5 (quarter asset disposed) =1,264.33 283,000 x 27.55% =77966.5 77966.5 x 62.5% = 48729.0625
Like-kind involving boot
- In most situations, one party normally provides some other property(e.g., cash) to "even out" the exchange. - Boot: property that is not like-kind property, including cash- The receipt of boot will trigger recognition of gain if there is realized gain. • Recognized gain: the lesser of the boot received or the realized gain - The giving of boot does not trigger recognition if the boot consists solely of cash. • If, however, the boot given is appreciated or depreciated property, gain or loss is recognized to the extent of the difference between the adjusted basis and the FMV of the boot. -the holding period of the property surrendered in the exchange carries over and tacks on the holding period of the like-kind property received ( the bott received has a new holding period)
involuntary conversions - qualified replacement property
- It must be similar and related in service or use.- Qualified replacement property of a personal residence is restricted to another residence.
Which of the following assets is NOT considered to be a capital asset?
- something held for an investment (stocks/bonds), for the production of income, or for personal use (car, house, personal computer) inventory in taxpayer's business
d. What amount of gain or loss does James recognize if he sells the stock for $2,000?
-400
To compute MACRS depreciation, a taxpayer must know
-asset's depreciable basis the date it was placed in service the applicable depreciation method the asset's recovery period the applicable depreciation convention
amortization - section 197 intangibles
-purchased intangibles such as patents, trademarks, and goodwill -these assets have a recovery period of 180 months, regardless of their actual life
Deirdre sold 100 shares of stock to her brother, James, for $2,400. Deirdre purchased the stock several years ago for $3,000. a. What gain or loss does Deirdre recognize on the sale?
0
Sandy sold 2 acres of land to her daughter, Tara. Sandy's basis in the land was $800 and she sold the land for $500. After owning the land for a year, Tara sold it to an unrelated party for $700. Tara's recognized gain on the land is $
0
Sandy sold 2 acres of land to her daughter, Tara. Sandy's basis in the land was $800 and she sold the land for $500. Sandy's recognized loss on the sale is $ .
0
c. What amount of gain or loss does James recognize if he sells the stock for $2,600?
0
Javier recently graduated and started his career with DNL Incorporated. DNL provides a defined benefit plan to all employees. According to the terms of the plan, for each full year of service working for the employer, employees receive a benefit of 1.5 percent of their average salary over their highest three years of compensation from the company. Employees may accrue only 30 years of benefit under the plan (45 percent). Determine Javier's annual benefit on retirement, before taxes, under each of the following scenarios (Use Exhibit 13-1): Note: Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. Leave no answers blank. Enter zero if applicable. Problem 13-54 Part a (Static) a. Javier works for DNL for three years and three months before he leaves for another job. Javier's annual salary was $55,000, $65,000, $70,000, and $72,000 for years 1, 2, 3, and 4, respectively. DNL uses a five-year cliff vesting schedule.
0 doesn;'t qualify under 5 year cliff
calculating depreciation for personal property
1. determine the appropriate convention by determining whether more than 40% of qualified property was placed in service in the last quarter of the tax year. 2. locate the applicable table provided in Rev. Proc. 87-57 3. select the column that corresponds with the asset's recovery period 4. find the row identifying the year of the asst's recovery period. -the intersection of the row and column provides the percentage of the asset's depreciable basis that is deductible as depreciation expense for the particular year
The nondeductible penalty for an early distribution is percent of the amount of the distribution. The nondeductible penalty for failing to receive a required minimum distribution is percent of the required minimum distribution.
10,50
For the 2022 tax year, taxpayers can elect to immediately expense 100Blank 1Blank 1 100 , Correct Unavailable% of qualified property as bonus depreciation. The bonus depreciation is calculated (before/after) afterBlank 2Blank 2 after , Correct Unavailable the Section 179 expense and (before/after) beforeBlank 3Blank 3 before , Correct Unavailable regular MACRS depreciation.
100, after, before
b. Rafael received $108,500 cash and was relieved of a $44,250 mortgage on the asset he sold to Jamal. Rafael also paid a commission of $7,350 on the transaction.
108,500 + 44,250 -7350 =145400
Lester sold a warehouse with an original cost of $150,000 for $230,000. The warehouse had accumulated depreciation of $40,000. The recognized gain on the sale was $270000Blank 1Blank 1 270000 , Incorrect Unavailable. The amount of the gain that is unrecaptured Section 1250 gain is $40000Blank 2Blank 2 40000 , Correct Unavailable and will be taxed at a maximum rate of 25Blank 3Blank 3 25 , Correct Unavailable percent. The remaining $230000Blank 4Blank 4 230000 , Incorrect Unavailable will be
120,000 40,000 25 80,000
Landshark, Inc. sold a warehouse with an original cost of $150,000 for $230,000. The warehouse had accumulated depreciation of $40,000. The recognized gain on the sale was $. Due to Section 291 depreciation recapture, $ will be taxed as ordinary income and $ will be Section 1231 gain.
120,000 8,000 112,000
Machinery Avery held for three years and then sold at a loss of $10,000.
1231
Office equipment Avery has used in its business for the past three years.
1231 asset
wo years ago, Avery purchased land and a warehouse. It uses these assets in its business.
1231 assets
Julie transferred a building with an adjusted basis of $240,000 for another building with a fair market value of $350,000 and $25,000 in cash. The exchange qualified as a like-kind exchange. The realized gain on the exchange was . The recognized gain on the exchange was $ Julie's adjusted basis in the building received is $
135,000 25,000 240,000
Troy received a gift of 100 shares of stock from his grandmother on July 1 of the current year. Troy's grandmother had owned the stock for fifteen years and had a basis of $14 per share. On July 1, the date of the gift, the stock was selling for $39 per share. What is Troy's basis in the stock?
14
Barbara's Bakery purchased three new 7-year assets during the current year. She chose NOT to use Section 179 immediate expensing or take bonus depreciation. The furnishings were purchased for $15,000 in April, the equipment for $6,000 in July, and the appliances for $40,000 in November. What amount of depreciation expense is allowable in the current year?
15,000 x .1785 =2677.5 6,000 x 1071 =642.6 40,000 x 357% = 1428 =4748.1
Barbara's Bakery purchased three new 7-year assets last year. She chose NOT to use Section 179 immediate expensing or take bonus depreciation. The furnishings were purchased for $15,000 in April, the equipment for $6,000 in July, and the appliances for $40,000 in November. What amount of depreciation expense is allowable in the current (second) year of ownership?
15,000 x .2347 =3520.5 6,000 x 25.51 =1530.6 40,000 x 2755% = =16,072
Zack received a gift of stock from his uncle on June 20 of the current year. Zack's uncle had a basis in the stock of $4,000, but the fair market value of the stock on June 20 was only $1,500. Zack held the stock for three months and then sold it for $1,200. What basis in the stock will Zack use to determine his gain or loss on the sale of the stock?
1500
Bill purchased a used automobile in the current year for $78,000 that will be used 100% for business. Assuming that the mid-quarter convention did NOT apply, what is the amount of depreciation he is allowed to take in the second year of the asset's life, assuming he elected NOT to take bonus depreciation in the first year?
16400
Under Code Section , businesses may elect to immediately expense up to $ of tangible personal property placed in service during 2022.
179 1,080,000
What is the recovery period for Section 197 intangibles?
180 months, regardless of their actual life
mid-quarter convention percentage of full-year's depreciation in year of disposition
1st - 12.5 5 = 1.5/12 2nd - 37.5% = 4.5/12 3rd 62.5 - 7.5 /12 4th 87.5 - 10.5/12
Jack and Diane decided to remodel their kitchen. They removed their old cabinets and replaced them with newer, nicer cabinets. They installed the old cabinets in a rental home that they own and lease to other people. The original cost of the old cabinets was $6,000. The fair market value on the date they were installed in the rental house was $2,500. The cost of the new cabinets was $11,000. What amount should Jack and Diane use as the basis for depreciation for the cabinets that have been installed in the rental property?
2,500 if an asset is used for personal purposes and is later converted to business (rental) use, the basis for cost recovery purposes is the lesser of 1. the cost basis of the asset 2. FMV of the asset on the date of conversion to business use
Rachelle purchased a warehouse 19 years ago in the month of September. The purchase price was $400,000. In May of the current year (year 20), Rachelle sold the warehouse. She will be able to deduct $ for depreciation on the warehouse in the year of sale. (Round your answer to the nearest whole dollar.)
2.564% x 400,000 4.5/12 =3,846
The mid-quarter convention is used for all assets purchased during the year when more than % of the tangible property purchased is placed in service during the fourth quarter of the year.
40, personal
Profitable businesses will likely use Blank______ depreciation while companies with lower marginal rates that are expected to rise over time will likely use Blank______ depreciation.
200 percent declining balance method, straight-line method
Alex wrecked his car and received $22,000 from the insurance company to replace it. His basis in the car was $20,000 and he spent $15,000 on a replacement vehicle. What is the amount of the recognized gain?
2000
e. The vehicle cost $80,000, and she used it 20 percent for business.
2022 y1 80,000 x 20% = 16,000 /5 = 32000 3200 / 2 for the first and last year 3200 even for the middle years
Darla owns a dress shop called Darla's Darling Dresses. During the past year, Darla traded her current location for a building a little farther out of town. Her current location had an original cost of $150,000 and a fair market value of $225,000 at the time she traded it. Depreciation on the facility totaled $37,500. Darla received a building and lot worth $200,000 and cash of $25,000 in the exchange. She paid sales commissions to the real estate broker of $10,000. Darla's amount realized on the sale is $ and the adjusted basis in the assets sold is $ producing a realized on the sale of $.
215,000 112,500 gain 102,500
Steve retired at the beginning of 2022. He worked for a company with a defined benefit plan. The plan provides for retirement benefits at a rate of 3% of the last three years' average compensation for every year of service. Steve had worked for this company for 30 years when he retired. His average salary for the last three years was $700,000. The maximum benefit Steve can receive from his retirement plan in 2022 is $ . (Enter your answer as a number.)
245,000
When an individual taxpayer sells depreciable real property at a gain, the lesser of the accumulated depreciation or the recognized gain is taxed at a maximum rate of %. If the recognized gain is higher than the accumulated depreciation, the remaining gain is taxed at a maximum of %.
25, 20
Teton trades land worth $29,500 (tax basis of $18,000) for land in a different location that is also worth $29,500. How much gain does Teton recognize on this exchange? - What is Teton's tax basis in the new land?
29,500 - 18,000 = 11,500 will be deferred gain so 0 basis 18,000
Wicker Rockers, Inc. is planning to offer a defined contribution plan for its employees. The company would like to incorporate a "cliff" vesting schedule for the employer contributions into the plan. What is the minimum vesting period the company can choose for a "cliff" vesting schedule?
3 years
A tornado destroyed a barn on Jim's farm. Jim's adjusted basis in the barn was $25,000 at the time of the storm. He received insurance proceeds of $30,000 which was the fair market value of the barn. How much will Jim need to invest in a new barn in order to defer the $5,000 gain?
30,000
c. Assuming IBO's cost of capital is 8 percent after taxes, how much deferred compensation should IBO be willing to pay Leslie that would make it indifferent between paying 10 percent of Leslie's current salary or deferring it for 10 years?
30,000 30,000 x 21% = 6,300 difference 23,700 x 2.1589 from the table = 51,165.93 / .79 (1-.21) = 64,767
Joe's Jalopies sold one of its warehouses for $300,000 cash plus a tractor with a fair market value of $25,000. The building had a mortgage against it for $50,000 that was assumed by the buyer and an adjusted basis of $130,000. Joe's had to pay $20,000 in sales commissions to the Realtor who coordinated the sale. What is the amount realized by Joe's Jalopies?
300,000 +25,000 + 50,000 - 20,000 =355,000 amount realized = cash recieved +FMV of other property +buyers assumption of liabilities - seller's expenses
Leslie participates in IBO's nonqualified deferred compensation plan. For 2022, she is deferring 10 percent of her $300,000 annual salary. Based on her deemed investment choice, Leslie expects to earn a 7 percent before-tax rate of return on her deferred compensation, which she plans to receive in 10 years. Leslie's marginal tax rate in 2022 is 32 percent. IBO's marginal tax rate is 21 percent (ignore payroll taxes in your analysis). (Use Table 1.) a. Assuming Leslie's marginal tax rate in 10 years (when she receives the distribution) is 33 percent, what is Leslie's after-tax accumulation on the deferred compensation?
300,000 x 10% = 30,000 via table 7% x 10 yrs 1.9671 1.9761 x 30,000= 59,013 59,013 x 33% = 19,474.29 59013 - 19,474.29
b. Assuming Leslie's marginal tax rate in 10 years (when she receives the distribution) is 20 percent, what is Leslie's after-tax accumulation on the deferred compensation?
300,000 x 10% = 30,000 via table 7% x 10 yrs 1.96715 1.97615 x 30,000= 59,014.5 x 20% = 11,802.9 59014.5 - 11802.9 = 47212
c. Rafael received $36,000 cash, a parcel of land worth $59,500, and marketable securities of $17,500. Rafael also paid a commission of $9,750 on the transaction.
36000+ 59,500 + 17500 - 9750 = 103250
Paula's Pastries expanded its facilities by building an addition to make room for a larger kitchen. The original building was constructed 12 years earlier and is being depreciated using a 39-year recovery period. The cost of the new addition will be depreciated over years.
39 depreciated at the same recovery period
John is trying to decide whether to contribute to a Roth IRA or a traditional IRA. He plans on making a $5,000 contribution to whichever plan he decides to fund. He currently pays tax at a 32 percent marginal income tax rate, but he believes that his marginal tax rate in the future will be 28 percent. He intends to leave the money in the Roth IRA or traditional IRA for 30 years, and he expects to earn a 6 percent before-tax rate of return on the account. (Use Table 1.)
5000 x 5.743 = 28,717.50 5,000 x 32% = 1600 28717.50 - 1600 = 27118
Charlie purchased land containing a large amount of trees for $225,000. He estimates the value of the land without the trees is $25,000 and that the timber is worth $200,000. He also estimates that he can get 1 million board feet of lumber from cutting the trees. In the first year of his endeavor, he cuts 250,000 board feet. Assuming Charlie uses the cost depletion method, his depletion expense for the year is $.
50000
In 2022, Bill purchased an automobile for $65,000 that will be used 80% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $ in regular MACRS depreciation the first year. However, he will only be able to deduct $ due to the luxury limitations.
52000, 14560
Suppose Teton is a corporation and it wants to maximize its first-year organizational expenditure deduction. Teton incurred$53,000 of organizational expenditures in year 1. How much of the organizational expenditures can Teton immediately deduct in year 1? - If Teton began business on February 1 of year 1, how much total cost recovery expense for the organizational expenditures is Teton able to deduct in year 1?
53,00 - 50,000 = 4,00 phase out 5,000 - 3,000 = 2,000 deduct in y1 51,000 x 11/180 = 3,117 total cost recovery 2,000 + 3,117 = 5,117
Lauren contributed $7,200 before-tax to her 401(k). If Lauren has a 24 percent marginal rate, her after-tax cost of the contribution is $ .
5472 7200 x 76%
. What are the amount and character of the gain or loss Longworth will recognize on the sale if the sale proceeds are decreased to $16,400?
55,500 - 28,200 = 27300 adjusted basis 16,400 - 27,300 = (10,900) gain / loss recognized ordinary income 0 1231 (10.9000) total gain / loss recognized character of recognized gain /loss ordinary gain/loss 1231 gain / loss
In year 0, Longworth Partnership purchased a machine for $55,500 to use in its business. In year 3, Longworth sold the machine for $38,600. Between the date of the purchase and the date of the sale, Longworth depreciated the machine by $28,200. Note: Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable. Problem 11-41 Part-a (Algo) a. What are the amount and character of the gain or loss Longworth will recognize on the sale?
55,500 - 28,200 = 27300 adjusted basis 38,600 - 27300 =11300 gain / loss recognized ordinary income 11300 total gain / loss recognized character of recognized gain /loss ordinary gain/loss 1231 gain / loss - 0
. What are the amount and character of the gain or loss Longworth will recognize on the sale if the sale proceeds are increased to $66,750?
55,500 - 28,200 = 27300 adjusted basis 66,750 - 27,300 =39,450 gain / loss recognized ordinary income ( lesser of accumulated depreciation or gain/loss recognized) 28,200 sec 1231 39,450 - 28,200 = 850 total gain / loss recognized character of recognized gain /loss ordinary gain/loss 1231 gain / loss
Emily purchased a building to store inventory for her business. The purchase price was $565,000. Emily also paid legal fees of $745 to acquire the building. In March, Emily incurred $2,000 to repair minor leaks in the roof (from storm damage earlier in the month) and $6,300 to make the interior suitable for her finished goods. What is Emily's cost basis in the new building?
572045
To be considered a qualified distribution from a Roth IRA, the account must have been open for at least years and the taxpayer must be at least years old.
59 1/2
william is a single writer (age 35) who recently decided that he needs to save more for retirement. His 2022 AGI before the IRA contribution deduction is $69,000 (all earned income). Note: Leave no answers blank. Enter zero if applicable. Problem 13-68 Part a (Static) a. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution William can make in 2022?
6000
In 2021, for taxpayers under age 50 at year-end, the sum of the employee and employer contributions to an employee's defined contribution account(s) is limited to the lesser of (1) $ or (2) percent of the employee's compensation for the year. Furthermore, the employee contributions to a 401(k) are limited to $ . (Enter your answers as numbers.)
61,000 , 100, 20.500
b. If he does participate in an employer-sponsored plan, what is the maximum deductible IRA contribution William can make in 2022?
69,000 - 68,000 = 1,000 / 10,000 = .10 x 6,000 = 5400
In 2022, Bill purchased a new automobile for $78,000 that will be used 100% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $ in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $ due to the luxury limitations.
78000, 18,200
Darla owns a dress shop called Darla's Darling Dresses. During the past year, Darla sold some assets to upgrade her facility. She sold racks and shelving units for $600 cash. In addition to the cash, the buyer gave two mannequins worth a total of $200 to Darla. The racks and shelving units had an original cost of $2,500 and had accumulated depreciation for tax purposes of $2,200. Darla's amount realized on the sale is and the adjusted basis in the assets sold is, producing a realized e on the sale of
800 300 GAIN 500
b. What amount of gain or loss does James recognize if he sells the stock for $3,200?
800 -600 = 200 if the related person buyer sells the property at a gain greater than the disallowed loss the entire loss that was disallowed for the related person seller is deductible by the buyer
Rayburn Corporation has a building that it bought during year 0 for $850,000. It sold the building in year 5. During the time it held the building, Rayburn depreciated it by $100,000. What are the amount and character of the gain or loss Rayburn will recognize on the sale in each of the following alternative situations? Note: Loss amounts should be indicated by a minus sign. Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable. Problem 11-43 Part-a (Static) a. Rayburn receives $840,000.
850,000 -100,000 = 750,000 840,000 - 750,000 = 90,000 gain recognized 90,000 x 20% = 18,000 2910depreciation recapture 90,000 - 18,000 = 72,000 1231 gain
b. Rayburn receives $900,000.
850,000 -100,000 = 750,000 900,000 - 750,000 = 150,000 gain recognized 100,000 x 20% = 20,000 2910 depreciation recapture (lesser of accumulated depreciation or gain recognized) 150,000 - 20,000 = 130,000 1231 gain
Frank purchased land containing oil reserves for $425,000. He has calculated his cost depletion for the year to be $20 per barrel for a total of $120,000 in depletion expense. He now needs to calculate his percentage depletion in case it is larger. His gross income from the oil extraction is $600,000 and he has $520,000 in operating expenses before depletion expense. Assuming this is domestic production, the amount of percentage depletion expense is $. If he uses this method he can deduct $ for tax purposes. He should use the depletion method to maximize his deduction.
90,000 , 80,000 cost
Christian received a gift from his aunt on January 4 of the current year. His aunt had a basis of $9,000 in the item. At the date of the gift, the item had a fair market value of $13,000. Christian's basis in the item is $.
9000 if the gift fmv < donee basis basis stays the same if the FMV > og basis take the FMV
Rafael sold an asset to Jamal. What is Rafael's amount realized on the sale in each of the following alternative scenarios? Problem 11-32 Part-b (Algo) a. Rafael received $97,500 cash and a vehicle worth $13,900. Rafael also paid $6,500 in selling expenses.
97,500+13900- 6500 =104,900
Which of the following statements is correct regarding IRA contributions for married taxpayers who file a joint tax return? Multiple choice question. The maximum deduction for the spouse with the lower amount of earned income is the same as that for unmarried taxpayers. Because of filing status, deductions are only allowed for one traditional IRA. A non-earning spouse's deductible contribution is limited to total earned income of both spouses reduced by contributions to the other spouse's IRAs. If only one spouse is an active participant in an employer's retirement plan, there is no deduction phase-out for the spouse who is not an active participant.
A non-earning spouse's deductible contribution is limited to total earned income of both spouses reduced by contributions to the other spouse's IRAs.
Basis for cost recovery
Businesses may begin recouping the cost of purchased business assets once they begin using the asset in their business (i.e., they place it in service) .- The amount of an asset's cost that has yet to be recovered through cost recovery deductions is called the asset's adjusted basis or tax basis. (Adjusted basis = Initial or historical basis - accumulated depreciation) • For most assets, the initial basis is the cost plus all the expenses to purchase, prepare for use, and begin using the asset. - Include sales tax, shipping costs, and installation costs
amortization - research and experimentation
Businesses may immediately expense these costs, orthey may elect to capitalize these costs and amortizethem using the straight-line method over thedeterminable useful life or, if there is nodeterminable useful life, over a period of not lessthan 60 months, beginning in the month benefits arefirst derived from the research
mid - quarter convention
Businesses must use the mid-quarter convention when more than 40% of their total tangible personal property that they place in service during the year is placed in service during the fourth quarter. - Under the mid-quarter convention, businesses treat assets as though they were placed in service during the middle of the quarter in which the business actually placed the assets into service. - If the mid-quarter convention applies, businesses must use the convention for all tangible personal property placed in service during the year. -disposition When the mid-quarter convention applies, the asset is treated as though it is sold in the middle of the quarter of which it was actually sold
For research expenses incurred in tax years beginning after December 31, 2021, which of the following methods are acceptable for the tax treatment of research and experimentation expenditures? (Check all that apply.) Multiple select question. Expense the costs immediately. Capitalize the costs and amortize them over the determinable useful life. Capitalize the costs and amortize them ratably over a 5 year period beginning with the midpoint of the year in which the costs were incurred. Capitalize the costs and depreciate them using MACRS with a 7-year recovery period.
Capitalize the costs and amortize them ratably over a 5 year period beginning with the midpoint of the year in which the costs were incurred.
For tax years beginning after December 31, 2021, which of the following methods is acceptable for the tax treatment of research and experimentation expenditures? Capitalize the costs and amortize them over not less than 36 months beginning the first month benefits are derived. Capitalize the costs and amortize them ratably over a 5 year period beginning with the midpoint of the year in which the costs were incurred. Capitalize the costs and depreciate them using MACRS with a 3-year recovery period. Expense the costs immediately.
Capitalize the costs and amortize them ratably over a 5 year period beginning with the midpoint of the year in which the costs were incurred.
Rick rents commercial warehouses to various businesses. He purchased a warehouse in May of the current year at a cost of $250,000. When calculating the warehouse depreciation in the fourth year of ownership, which column of Table 5 should Rick use?
Column 5 because the original purchase was made in May, the fifth month of the year.
The amount of the cost that can be recovered on an annual basis for the investment in natural resources is the larger of which of the following two methods? (Check all that apply.) Multiple select question. MACRS depletion method Straight-line depletion method Cost depletion method Percentage depletion method
Cost depletion method Percentage depletion method
determination of adjusted basis - gift
Definition: a transfer of property proceeding from a detached and disinterested generosity or out of affection, respect, admiration, charity, or like impulses- The initial basis of gift property to a recipient depends on whether the value of the asset exceeds the donor's basis on the date of the gift. -if a property's FMV on the date of the gift > the donor's basis in the property - carryover basis - if a property's FMV on the date of the gift < the donor's basis in the property dual basis rules -gain basis: carryover basis -loss basis : FMV on the date of the gift -if the sale proceeds fall between the donor's basis and the property's FMV at the date of the gift no gain or loss is recognized
depletion
Depletion is the method taxpayers use to recover their capital investment in natural resources. .• Businesses compute annual depletion expense under both the cost and percentage depletion methods and deduct the larger of the two. - Under cost depletion, taxpayers must estimate or determine the number of recoverable units or reserves that remain at the beginning of the year and allocate a pro rata share of the property's adjusted basis to each unit. Then it is multiplied by the number of units sold during the year. - The amount of percentage depletion for a natural resource business activity is determined by multiplying the gross income from the resource extraction activity by a fixed percentage based on the type of natural resource.
Section 1250 recapture
Depreciable real property, such as an office building or a warehouse, sold at a gain is subject to a different type of recapture called §1250 depreciation recapture. - Under §1250, when depreciable real property is sold at a gain, the amount of gain recaptured as ordinary income is limited to additional depreciation (the excess of accelerated depreciation deductions on the property over the amount that would have been allowed under the straight-line method of depreciation) -.Under current law, real property is depreciated using the straight-line method so §1250 recapture generally no longer applies.
personal property depreciation
Depreciation Conventions- The depreciation convention specifies the portion of a full-year's depreciation the business can deduct for an asset in the year the asset is first placed in service and in the year the asset is sold. - For personal property, taxpayers must use either the half-year convention or the mid-quarter convention. The half-year convention applies most of the time, but under certain conditions, taxpayers arerequired to use the mid-quarter convention. -once the convention is determined for the assets acquired during the year, the convention remains the same for the entire cot recovery period for those assets
Which of the following choices reduces the basis of an asset? (Check all that apply.) Multiple select question. Ordinary repairs related to the asset Maintenance costs related to the asset Depreciation allowed, but not deducted, on the asset Depreciation actually deducted on the asset
Depreciation allowed, but not deducted, on the asset Depreciation actually deducted on the asset
depreciation recapture
Depreciation recapture potentially applies to gains (but not losses) on the sale of depreciable or amortizable business property. - When depreciation recapture applies, it changes the character of the gain on the sale of §1231 asset (all or a portion of the gain) from§1231 gain into ordinary income. • The method for computing the amount of depreciation recapture depends on the type of §1231 asset the taxpayer is selling.
Which of the following choices is a characteristic of stock options? Multiple choice question. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. If the market price is below the strike price, the employee may purchase the stock at FMV and sell it to the company for the option price. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. Employees must exercise their options on the vesting date regardless of the market price.
Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates.
Which of the following choices is a characteristic of stock options? Multiple choice question. If the market price is below the strike price, the employee may purchase the stock at FMV and sell it to the company for the option price. Employees must exercise their options on the vesting date regardless of the market price. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates.
Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates.
Which of the following choices are characteristics of stock options? (Check all that apply.) Multiple select question. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. Employees may choose NOT to exercise their options if the market value of the shares is below the strike price. If the market price is below the strike price, the employee may purchase the stock at FMV and sell it to the company for the option price. The employee will receive the stock on the vesting date without having to pay for it.
Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. Employees may choose NOT to exercise their options if the market value of the shares is below the strike price.
Why do employees prefer ISOs to NQOs?
Employees who meet the required holding period for ISOs will treat the difference between the sales proceeds and exercise price as a long-term capital gain.
Which of the following fringe benefits are nontaxable fringe benefits for the recipient? (Check all that apply.) Multiple select question. Employer-paid premiums on a $50,000 group-term life insurance policy Season tickets for the local NFL team The cost of meals and lodging that is for the convenience of the employer Employer-paid health insurance A below-market loan provided to an employee who needed an advance on his pay
Employer-paid premiums on a $50,000 group-term life insurance policy The cost of meals and lodging that is for the convenience of the employer Employer-paid health insurance
Which of the following statements is INCORRECT regarding the timing of employer deductions for compensation and the employees' inclusion of compensation in gross income? Multiple choice question. Employers using the cash method of accounting must deduct salaries and wages in the year they pay the employees. Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation. When the employer and the employee are related, the employer must deduct wages expense in the same year the employee reports it as gross income. Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method.
Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method.
Which of the following characteristics describe defined contribution plans? (Check all that apply.) Multiple select question. The plan specifies the amount of the distribution at retirement rather than the up-front payment the employer will make to the employee's plan. The employee bears the investment risk and funding responsibility. Employers choose how the amounts in the retirement account are invested. Employers must maintain separate accounts for each employee participating in the plan. Employees may contribute more to the plan than the employer contributes.
Employers must maintain separate accounts for each employee participating in the plan. Employees may contribute more to the plan than the employer contributes. The employee bears the investment risk and funding responsibility
Which of the following statements is correct regarding employers' treatment of salaries and wages?
Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation.
Which of the following statements is correct regarding employers' treatment of salaries and wages? Multiple choice question. Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation. Employers using the cash method of accounting must deduct salaries and wages in the year the employees earn the compensation. When the employer and the employee are related parties, both parties must use the accrual method to recognize the deduction and the income. Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method.
Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation. Need help? Review these concept resources.
amortization - organizational expenditures and start-up costs
Expenditures to form and organize a business in the form of a corporation or an entity taxed as a partnership. • Businesses may immediately expense up to $5,000 of organizational expenditures .• Phased out dollar-for-dollar if organizational expenditures exceed $50,000• Businesses amortize organizational expenditures that they do not immediately expense using the straight-line method over 15 years.
Hannah Tywin owns 100 shares of MM Incorporated stock. She sells the stock on December 11 for $25 per share. She received the stock as a gift from her Aunt Pam on March 20 of this year when the fair market value of the stock was $18 per share. Aunt Pam originally purchased the stock seven years ago at a price of $12 per share. What are the amount and character of Hannah's recognized gain or loss on the stock?
FMV day of gift > basis then the asset's intial basis to the recipient of the gift will be the same as the donors basis basis = 12 x 100 =1200 25 x 100 =2500 gain 1300 long term capital gain
True or false: One difference between traditional IRAs and Roth IRAs is that there is no phase-out based on AGI for contributions to a Roth IRA. True false question.TrueFalse
False Reason: Even though contributions are NOT deductible, the maximum level of the allowed contribution may be phased out at higher levels of AGI.
True or false: Individuals participating in a defined contribution plan who are at least 50 years of age by the end of the year have contribution limits that are lower than individuals less than 50 years old.
False Reason: Individuals who are 50 or over can contribute more since they are closer to retirement and may need to "catch up" in their later years.
True or false: The after-tax rate of return on a contribution to a traditional defined contribution plan will decrease as compared to the before-tax rate of return the longer the taxpayer waits before taking distributions because deferring the distribution increases the present value of the taxes paid on the distribution.
False Reason: The after-tax rate of return will increase more compared to the before-tax rate of return by deferring the distribution because the present value of the taxes will decrease.
depreciation for AMT
For AMT purposes, businesses are not allowed to use the 200percent declining balance method to depreciate tangible personal property. Rather, they must choose from the 150percent declining balance method or the straight-line method to depreciate the property for AMUT purposes. .• The §179 expense and bonus depreciation are equally deductible for both regular tax and AMT purposes.
When comparing depreciation rules for regular tax purposes to those for alternative minimum tax (AMT) purposes, which of the following statements are incorrect? (Check all that apply.) Multiple select question. The allowable recovery periods and conventions are the same for all depreciable assets for AMT purposes as for regular tax purposes. For AMT, the total AMT depreciation is always added to regular taxable income to calculate the AMT base. Bonus depreciation is deductible for both regular tax purposes and AMT purposes. For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method. Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes.
For AMT, the total AMT depreciation is always added to regular taxable income to calculate the AMT base. For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method. Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes.
determination of adjusted basis - property converted from personal use to business use
For appreciated property, the taxpayer will use her basis to calculatedepreciation and gain or loss at disposition.- For property with a basis greater than value, the dual basis rules apply.• For depreciation, taxpayers must use the FMV at the date of conversion regardlessof whether the taxpayer subsequently sells the property for a gain or a loss
Real property depreciation
For depreciation purposes, real property is classified as land, residential rental property, or nonresidential property.- Land is not depreciable. - Residential rental property: dwelling units such as houses, condominiums, apartment complexes- Nonresidential rental property: all other buildings such as office buildings, manufacturing facilities, shopping malls, etc. If a building is substantially improved (i.e., expanded) at some point after the initial purchase, the building addition is treated as a new asset with the same recovery period of the original building. .• All depreciable real property is depreciated for tax purpose using the straight-line method .• All real property is depreciated using the mid-month convention. - Allows one-half of a month's depreciation for the month in which the property was placed in service and in the month of the year it is sold -Mid-month convention for year of disposition- Multiply the full-year's depreciation by: • (Month in which the asset was disposed of - 0.5)/12
determination of adjusted basis - holding period for property acquired by gift
If the donee's basis is the carryover basis begins on the date the donor acquired the property. - If the donee's basis is the FMV: begins on the date of the gift
Which of the following statements is correct regarding the depreciable lives of business assets? Multiple choice question. For tax purposes, GAAP has predetermined estimated lives. For financial accounting, Congress has set recovery periods for various types of assets. For financial accounting, management can choose the estimated life. For tax purposes, Congress has set recovery periods for various types of assets. The same recovery period (or estimated life) must be used for tax purposes as for financial accounting purposes. For tax purposes, management can choose the estimated life. For financial accounting, GAAP has set recovery periods for various types of assets.
For financial accounting, management can choose the estimated life. For tax purposes, Congress has set recovery periods for various types of assets.
installment sales
For tax purposes, an installment sale is any sale of property where the seller receives at least one payment in a taxable year subsequent to the year of disposition of the property .• Under the installment method, taxpayers determine the amount of realized gain on the transaction, and they recognize the gain pro rata as they receive the installment payments .- Taxpayers selling marketable securities or inventory on an installment basis may not use the installment method to report gain on the sales. Also, any depreciation recapture is not eligible for installment reporting.
Assume that Timberline Corporation has 2022 taxable income of $258,000 for purposes of computing the §179 expense. It acquired the following assets in 2022: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) AssetPurchase DateBasisFurniture (7-year)December 1$ 412,000Computer equipment (5-year)February 28108,000Copier (5-year)July 1548,000Machinery (7-year)May 22482,000Total $ 1,050,000 Problem 10-58 Part b (Algo) b. What would Timberline's maximum depreciation deduction be for 2022 assuming no bonus depreciation?
From the previous problem we figured out that the 179 expense that could be deducted 258,000 since we don't want to have a large purchase in the last quarter and make it a monthly quarter we apply the 258,000 179 expense to reduce the base of the furniture making it less than 40% of the purchases for the year and making it a half yea convention 412,000 -258,00 =154,000 x 14.29% =22,006.6 108,000 x 20% =21,600 48,000 x 20% =9,600 482000 x 14.29% = 68,877.8 make sure to add the 179 expense to the total = 380,084.4
determination of adjusted basis - inherited property
Generally, the heir's basis in property is the fair market value on thedate of the decedent's death. - The holding period is deemed to be long term regardless of how longthe heir owns the property.
Which of the following statements is INCORRECT when referring to installment sales? Multiple choice question. If there is a loss on an installment sale, the loss is recognized pro rata as the seller receives the installment payments. Inventory cannot be accounted for under installment sale rules. In order to qualify as an installment sale, at least one payment must be receive in a taxable year after the year of property disposition. If there is a gain on an installment sale, the gain is recognized pro rata as the seller receives the installment payments.
If there is a loss on an installment sale, the loss is recognized pro rata as the seller receives the installment payments.
Special rules relating to cost recovery
Immediate expensing (§179)- Under §179, businesses may elect to immediately expense up to$1,080,000 of qualified property placed in service during 2022. • Qualified property does not include property with prior use by the taxpayer. • Business may elect to deduct less than the maximum .- When businesses elect to deduct a certain amount of §179 expense, they immediately expense all or a portion of an asset's basis or several assets' bases .• They must reduce the basis of the asset or assets (to which they applied the §179amount) before they compute MACRS depreciation. -businesses qualifying for immediate expensing are allowed to choose the asset or assets. if a business's objective is to maximize its current year depreciation deduction, it should immediately expense the asset with the lowest first-year cost recovery percentage including bonus depreciation
Which of the following rules for determining the basis of a personal residence is measured INCORRECTLY? Multiple choice question. Converted property (from rental home to residence) - the taxpayer's basis in the home at the time of conversion Purchase - the cost of the home to the taxpayer Gift - the donor's basis Inheritance - the basis carries over from the deceased owner
Inheritance - the basis carries over from the deceased owner
half-year convention
One-half of a year's depreciation is allowed in the first and last years of an asset's life. .- The IRS depreciation tables automatically account for the half-year convention in the acquisition year. - disposition The MACRS tables can't anticipate when a business may dispose of an asset, and therefore, the tables only provide depreciation percentages for assets assuming the asset won't be disposed of before it is fully depreciated. - To calculate the depreciation for the year of disposition assuming half-year convention: first calculate depreciation for the entire year and multiply the full-year's depreciation by 50% (one-half of a year's depreciation) *However, if a business acquires and disposes of an asset in the same tax year, it is not allowed to claim any depreciation on the asset.
bonus depreciation
Qualified property- To qualify, property must be new or used property (as long as the property has not previously been used by the taxpayer within the past five years) and must meet one of the following requirements. :• Have a regular depreciation life of 20 years or less, • Computer software, • Water utility property, or • Qualified film, television, and live theatrical productions.
like-kind property
Real property is eligible for like-kind treatment while personal property is not. - Real property is considered to be like-kind with any other type of real property as long as the real property is used in a trade or business or held for investment .- Real property held for sale in the course of ordinary business is not eligible for like-kind treatment .- Real property located in the U.S. and real property located outside the U.S. are not like-kind.
Tyler earns $80,000 per year and has a 22 percent marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $4,680. How much salary should Tyler be willing to forgo to receive the $4,680 in health insurance coverage?
Reason: $4,680/(1-.22) = $6,000
Van Winkle received stock options from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock several months later for $38 per share. What is the total bargain element on Van's stock?
Reason: ($32-$20) x 100; $12 x 100 = $1,200 the difference between the market price on the day and the exercise price not the sold price
Tyler has a 24 percent marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $5,040. If Tyler pays that same amount for health insurance premiums, he will need $7,000 in order to pay the premiums and the taxes on the compensation. How much of a cash flow savings is available to the company if it pays $5,040 for Tyler's health insurance, rather than $7,000 in compensation assuming the company has a 21 percent tax rate?
Reason: ($7,000-$5040) x (1-.21) = $1,548
Which of the following choices BEST describes the process of netting Section 1231 gains and losses?
Recharacterize all or part of the gain as ordinary income as deemed by Sec. 1245, 291, or 1239. Then combine remaining 1231 gains and losses.
involuntary conversions
Recognized gain on an involuntary conversion: the lesser of- The gain realized on the conversion, or - The amount of reimbursement the taxpayer does not reinvest in qualified property • The character of any gain recognized in an involuntary conversion depends on the nature of the asset that was converted. • The basis of the replacement property in an involuntary conversion is calculated in the same way it is for like-kind exchange property.
Which of the following statements is correct regarding gains and losses?
Recognized gains always increase a taxpayer's gross (taxable) income.
How can a taxpayer defer a gain on an involuntary conversion?
Reinvest all of the proceeds from the involuntary conversion into replacement property
1231 look-back rule
Requires taxpayers who recognize net §1231 gains in the current year to recapture current-year gains as ordinary to the extent the taxpayer deducted ordinary net §1231 losses in prior years. - To the extent of the nonrecaptured net §1231 loss' (i.e., losses that have not already been used to recapture net §1231 gains in a later tax year)- "Look-back" to the 5-year period preceding the current tax year - If the current year net §1231 gain includes unrecaptured §1250 gains ,they are recharacterized as ordinary before other §1231 gains. • The remaining net §1231 gain exceeding the look back recapture is given long-term treatment.
Businesses deduct percentage depletion when they the natural resource, and they deduct cost depletion in the year they or extract the natural resource.
SELL, PRODUCE
Costs, such as investigating the possibilities of and actually creating or acquiring a trade or business, are referred to as - costs.
START-UP
Which of the following depreciation provisions are available to listed property that is used more than 50% for business purposes? (Check all that apply.) Multiple select question. Section 179 expensing on the business-use percentage of the cost MACRS depreciation on the business-use percentage of the cost Section 179 expensing on the total cost MACRS depreciation on one-half of the total cost Bonus depreciation on the business-use percentage of the cost
Section 179 expensing on the business-use percentage of the cost MACRS depreciation on the business-use percentage of the cost Bonus depreciation on the business-use percentage of the cost
Which of the following costs should be included in the asset's original cost basis? (Check all that apply.) Multiple select question. Shipping charges Repairs after putting the asset in service Purchase price Sales tax Installation charges Repairs prior to putting the asset in service Depreciation
Shipping charges Purchase price Sales tax Installation charges Repairs prior to putting the asset in service
depreciation
Since 1986, businesses have calculated their tax depreciation using the Modified Accelerated Cost Recovery System (MACRS).
During the prior three years, listed property was being used 75% for business and 25% for personal use. For the current and future years, business use has dropped to 40%. Which of the following statements is correct?
Since the business use has dropped to 50% or below, the excess of accelerated depreciation over straight-line for all prior years must be recaptured.
Involuntary Conversions
Sometimes, taxpayers may involuntarily dispose of property due to circumstances beyond their control. (involuntary conversions) - Occurs when property is partially or wholly destroyed by a natural disaster or accident, stolen, condemned, or seized via eminent domain by a government agency • Taxpayers may realize a gain from involuntary conversions if they receive replacement property or insurance proceeds in excess of their basis in the property that was stolen or destroyed. • Tax laws allow taxpayers to defer the gains on in voluntary conversions. Taxpayers may defer realized gains on both direct and indirect involuntary conversion. - Direct conversions occur when taxpayers receive a direct property replacement for the involuntarily converted property. - Indirect conversions occur when taxpayers receive money for the involuntarily converted property through insurance reimbursement or some other type of settlement. • Taxpayers can defer realized gains on indirect conversions if they acquire qualified replacement property within a prescribed time limit, which is generally two years (3 years in the case of condemnation) after the close of the tax year in which they receive the proceeds.
Which of the following depreciation provisions are available to listed property that is used less than 50% for business purposes?
Straight-line depreciation on the business-use percentage of the cost
Three years ago, Sydney remodeled her home. Rather than discarding some shelving units that were in her home, she moved them to the employee lounge of the business that she owns. Her original cost (basis) in the shelves was $3,500. The fair market value of the shelves when she converted them to business use was $1,500. Sydney has taken depreciation on the shelves of $300. She sold the shelving units this year for $1,000. What is the amount of her basis and the amount of the gain or loss recognized on the sale of the shelves?
Sydney's basis is $1,200 and her loss is $200.
determination of adjusted basis
Taxpayers may acquire assets without purchasing them. In those cases, the taxpayer's initial basis in the asset must be computed as something other than purchase price. • Gifts, inherited assets, and property converted from personal use to business use
Regarding natural resources OTHER THAN oil and gas, which of the following statements is true for percentage depletion, but NOT true for cost depletion? Multiple choice question. The method can NOT be used once the cost of the resource has been recovered. The amount of depletion is calculated in the year the businesses produces or extracts the natural resource. The amount can NOT exceed 50 percent of the taxable income from the natural resource business activity before deducting the depletion expense. Need help? Review these concept resources.
The amount can NOT exceed 50 percent of the taxable income from the natural resource business activity before deducting the depletion expense.
Andrew's Art Studio, a calender year company, purchased three assets during the year. A computer costing $1,500 was purchased in April; office furniture costing $1,800 was purchased in July; and a delivery truck costing $17,000 was purchased in October. Which of the following statements is correct regarding the depreciation of the assets (assuming no bonus deprecation is taken)?
The art studio can use the half-year convention for the computer and the office furniture if the delivery truck is expensed under Section 179. Need help? Review these concept resources.
A calendar year-end business purchased a new delivery truck at the end of March during the current year. The truck was the only asset purchased during the year. Which of the following statements is correct regarding the depreciation that can be taken on the truck?
The business will deduct one-half of a full year's depreciation on the truck in the current year.
Mark's Markers purchased a new machine to use in the manufacturing process for $2,500. The sales tax was an additional $150 and the shipping charges were $200. One month after using the machine, a small part broke and needed repair. The cost of the repair was $900. How will Mark's Markers treat the costs for tax purposes? The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately. The cost of $2,500 will be capitalized and depreciated over the asset's life. The other costs of $1,250 will be expensed immediately. The cost of $2,700 will be capitalized and depreciated over the asset's life. The repairs and tax of $1,050 will be expensed immediately. The cost of $2,650 will be capitalized and depreciated over the asset's life. The shipping and repairs of $1,100 will be expensed immediately.
The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.
amortization
The cost of intangible assets is recovered throughamortization.- Example) capitalized research and experimentation (R&E) costs,covenants not to compete• When the life of intangible assets cannot be determined,taxpayers recover the cost of the assets when they dispose ofthem, unless they are assigned a specific tax recovery period.
Andrews Art Studio purchased its shop fifteen years ago. During the current year, the business installed a new roof and central air-conditioning system. Which of the following choices is correct regarding the substantial improvements made during the current year?
The cost of the assets will be classified as nonresidential property and recovered over 39 years.
Which one of the following characteristics applies to taxable fringe benefits? Multiple choice question. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employers are not allowed a deduction for taxable fringe benefits as they are not treated the same as cash compensation. Employees are not subject to FICA tax on taxable fringe benefits.
The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee.
Which of the following characteristics apply to taxable fringe benefits? (Check all that apply.) Multiple select question. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit. Employers treat the taxable fringe benefits the same as cash compensation. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level.
The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit. Employers treat the taxable fringe benefits the same as cash compensation.
How are distributions from defined benefit plans treated for tax purposes? Multiple choice question. The distributions are taxable as ordinary income. The amount that represents a return of the contributions made to the fund is tax-exempt and the amount from earnings of the fund is ordinary income. The amount that represents a return of contributions made to the fund is capital gain and the amount from earnings of the fund is ordinary income. The distributions are taxable as capital gain.
The distributions are taxable as ordinary income.
Which of the following choices are characteristics of restricted stock? (Check all that apply.) Multiple select question. The employee is not required to pay for the stock but rather is given the shares on the grant date. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. The employee may sell the stock immediately after the vesting date or retain it, but there is NO required holding period. Employees must use cash to purchase the employer's stock once the vesting date is reached.
The employee is not required to pay for the stock but rather is given the shares on the grant date. The employee may sell the stock immediately after the vesting date or retain it, but there is NO required holding period.
Which of the following statements is INCORRECT concerning the ownership and use tests used to qualify for the exclusion of a gain on the sale of a personal residence?
The exclusion of the gain on the sale of a personal residence can only be used once every five years.
Which of the following statements is INCORRECT regarding defined benefit plans for 2022? Multiple choice question. The level of benefits is a function of how well the funds were invested and the market growth over the employee's working years. The formula for determining benefits is usually a function of years of service and recent compensation levels. Distributions from defined benefit plans are ordinary income to the taxpayer. For employees who begin receiving retirement benefits in 2022, the maximum annual benefit is the lesser of (1) 100 percent of the average of the three highest years of compensation, limited to the annual compensation limitation for each of the three years or (2) $245,000.
The level of benefits is a function of how well the funds were invested and the market growth over the employee's working years.
Assume that Timberline Corporation has 2022 taxable income of $258,000 for purposes of computing the §179 expense. It acquired the following assets in 2022: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) AssetPurchase DateBasisFurniture (7-year)December 1$ 412,000Computer equipment (5-year)February 28108,000Copier (5-year)July 1548,000Machinery (7-year)May 22482,000Total $ 1,050,000 Problem 10-58 Part a (Algo) Required: a-1. What is the maximum amount of §179 expense Timberline may deduct for 2022? a-2. What is Timberline's §179 carryforward to 2023, if any?
The limit is 1,080,000 but it is limited to the taxable income which in this case is 258,000 the rest can be carried forward based on your ttoal 1,050,000 -258,000 = 792000
Which of the following statements is INCORRECT when describing the advantages and disadvantages of making a Section 83(b) election for restricted stock? Multiple choice question. The market value of the stock is taxed as ordinary income on the grant date, providing a tax advantage if the value increases after that date. The election allows the employee to potentially convert part of the ordinary income resulting from receiving the stock to long-term capital gain. The market value of the stock is taxed at the lower capital gains rate on the grant date. If employment is terminated before the vesting date, the employee can NOT recoup the tax that was paid on the grant date or receive the stock
The market value of the stock is taxed at the lower capital gains rate on the grant date.
When an employee has a Roth 401(k) with an employer match, how are the employer's matching funds applied? Multiple choice question. The employer is able to invest the matching funds directly into the employees' chosen investments for their Roth 401(k)'s. The employee will lose the matching funds if a Roth 401(k) is chosen because the employer is NOT allowed to invest in that type of account. The employee can elect to pay income tax on the amount of the employer's contribution, so that the matching funds can be applied in the Roth 401(k). The matching funds must be put in a traditional 401(k) for the employee because employers can NOT make contributions to a Roth 401(k).
The matching funds must be put in a traditional 401(k) for the employee because employers can NOT make contributions to a Roth 401(k).
Lucky started a new business last year. Since it was the first year of operation, the business purchased $10,000 in machinery and used the straight-line method for depreciation. Business is booming, so Lucky purchased $15,000 in equipment during the current year to help meet production demands. Which of the following statements is true regarding the depreciation choices available to Lucky?
The new machinery can be depreciated using the same method or a different method than the previously purchased machinery.
When a taxpayer engages in a qualified like-kind exchange, how is the gain or loss on the exchange treated?
The recognition of the gain or loss is deferred and taxed in a subsequent transaction.
What is the recovery period for patents that have been purchased by a business (not as part of an acquisition of another entire business)?
The remaining legal life of the patent at the time of the purchase
How does depreciation affect the tax basis of an asset? Multiple choice question. The original basis is increased by the depreciation expense deducted on the tax return each year. The tax basis is reduced by the depreciation allowed or allowable on the asset each year. The tax basis is reduced by the depreciation expense deducted on the tax return each year. The original basis is increased by the depreciation allowed or allowable on the asset each year.
The tax basis is reduced by the depreciation allowed or allowable on the asset each year.
Luxury Automobiles
The tax laws generally limit the annual depreciation deduction for automobiles .• In 2022, taxpayers are allowed to expense $8,000 of bonus depreciation above the otherwise allowable maximum depreciation (maximum depreciation of $18,200) -exhibit 10-10 automobile depreciation limits
Which of the following statements is correct when describing the tax treatment to the employees of stock options? Multiple choice question. The bargain element is taxed as ordinary income on the grant date for NQOs. The bargain element is taxed as ordinary income on the vesting date for both ISOs and NQOs. The bargain element is taxed as ordinary income on the grant date for ISOs. There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs.
There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs.
Which of the following statements is correct when describing the tax treatment to the employees of stock options? Multiple choice question. The bargain element is taxed as ordinary income on the vesting date for both ISOs and NQOs. The bargain element is taxed as ordinary income on the grant date for ISOs. There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs. The bargain element is taxed as ordinary income on the grant date for NQOs.
There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs.
Which of the following statements is correct regarding the depreciation of automobiles weighing over 6,000 pounds?
These vehicles can be depreciated using regular MACRS percentages.
How are salaries and wages taxed? (Check all that apply.) Multiple select question. They are subject to FICA tax. They are taxed as capital gains. They are taxed as ordinary income. They are taxed when earned, rather than when the money is received. They are taxed when received, rather than when earned.
They are taxed as ordinary income. They are subject to FICA tax. They are taxed when received, rather than when earned.
Julie transferred a building with an adjusted basis of $240,000 for another building with a fair market value of $350,000. The exchange qualified as a like-kind exchange. The realized gain on the exchange was $. The recognized gain on the exchange was $. Julie's adjusted basis in the building received is $.
They exchange the basis they have i the property they are giving up and transfer it to the basis of the property they are receiving 110,000, 0, 240,000
unrecaptured 1250 gain for individuals
This gain represents the part of the gain on §1250 property that is attributable to depreciation that was not recaptured by §1250. • Under current law, real property is depreciated using the straight-line method - as a result, all of the gain attributable to depreciation on such assets is unrecaptured §1250 gain .• Unrecaptured §1250 gain is §1231 gain that, if ultimately characterized as a long-term capital gain, is taxed at a maximum rate of 25%.
tax-deferred transactions
Under certain tax provisions, taxpayers defer or delay recognizing a gain or loss until a subsequent period. • Congress allows taxpayers to defer recognizing gains in certain types of exchanges because the exchange itself does not provide the taxpayers with the wherewithal (cash) to pay taxes on the realized gain if the taxpayers were required to immediately recognize the gain
Which of the following assets purchased in the current year are eligible to be expensed under Section 179 assuming the cost does NOT exceed the limitations? (Check all that apply.) Multiple select question. Used equipment Storage warehouse New office furniture Land for future building site New delivery truck Apartment complex
Used equipment New office furniture New delivery truck
Van Winkle received nonqualified stock options (NQOs) from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock two years later for $48 per share. Which of the following choices is correct?
Van's gain on the sale will be a $1,600 long-term capital gain recognized on the sale date.
Van Winkle received incentive stock options (ISOs) from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock two years later for $48 per share. Assuming he meets the required holding periods to qualify for the tax treatment afforded incentive stock options, which of the following choices is correct?
Van's gain on the sale will be a $2,800 long-term capital gain.
Like-kind exchanges
While taxpayers selling property for cash must immediately recognize gain on the sale, taxpayers exchanging property for assets other than cash must defer recognizing gain (or loss)realized on the exchange if they meet certain requirements.(Like-kind exchange) • For an exchange to qualify as a like-kind exchange for tax purposes, the transaction must meet the following three criteria: - Real property is exchanged "solely for like-kind" property.- Both the real property given up and the real property received in the exchange by the taxpayer are either "used in a trade or business" or" held for investment" by the taxpayer. - The exchange must meet certain time restrictions.
Lina purchased a new car for use in her business during 2022. The auto was the only business asset she purchased during the year, and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless stated otherwise) for the automobile in 2022 and 2023 (Lina doesn't want to take bonus depreciation for 2022 or 2023) in the following alternative scenarios (assuming half-year convention for all): (Use MACRS Table 1, Table 2, and Exhibit 10-10.) Problem 10-67 Part a (Static) a. The vehicle cost $35,000, and business use is 100 percent (ignore §179 expense).
Y1 20% x 35000 = 7,000 Y2 32% x 35000 =11,200
After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $312,000. Ingrid allocated $52,000 of the purchase price to goodwill. Ingrid's business reports its taxable income on a calendar-year basis. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Problem 10-71 Part a (Algo) a. How much amortization expense on the goodwill can Ingrid deduct in year 1, year 2, and year 3?
Y1 52,000 /15 *8 /12 y2 52,000 / 15 y3 52,000 /15
c. The vehicle cost $80,000, and she used it 80 percent for business.
Y1 luxury auto limit 10,200*.8= 8160 y2 luxury auto limit 16,400*.8=13,120
Hans runs a sole proprietorship. Hans has reported the following net §1231 gains and losses since he began business. Net §1231 gains shown are before the look-back rule. Note: Leave no answers blank. Enter zero if applicable. YearNet §1231 Gains/(Losses)Year 1$ (74,000)Year 219,500Year 30Year 40Year 513,600Year 60Year 7 (current year)54,500 Problem 11-54 Part-b (Algo) b. Assume that the $54,500 net §1231 gain occurs in year 6 instead of year 7. What amount of the gain would be treated as ordinary income in year 6?
Y7 - 0 Y6 - 40,900
The mid-quarter test is applied beforeBlank 1Blank 1 before , Incorrect Unavailable (before/after) the Section 179 expense is deducted from an asset's basis, and beforeBlank 2Blank 2 before , Correct Unavailable (before/after) bonus depreciation is taken.
after, before
b. Baker received $450,000 in insurance proceeds and spent $500,000 rebuilding the building during the current year.
amount realized 450,000 - 250,000 = 200,000 realized gain 500,000 - 200,000 = 300,000 basis replacement realized gain recognized gain- 0 basis of replacement property
The from a sale or other disposition of an asset is everything of value received from the buyer less any selling costs.
amount realizes
Assets that are held for investment, used in the production of income (in a venture that does not rise to the level of a trade or business), or used personally by a taxpayer are referred to as assets
capital
1,000 shares of stock in Plaid corporation that Avery purchased two years ago because it was a good investment.
capital asset
Identify each of Avery Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-a (Static) a. Two years ago, Avery used its excess cash to purchase a piece of land as an investment.
capital asset
depreciation recovery period
cars, light general-purpose trucks, and computers and peripheral equipment - 5 years office furniture, fixtures, and equipment - 7 years qualified improvement property - 15 years
Brittany started a law practice as a sole proprietor. She owned a computer, printer, desk, and file cabinet she purchased during law school (several years ago) that she is planning to use in her business. AssetPurchase PriceFMV at Time Converted to Business UseComputer$ 6,100$ 4,400Printer3,9003,750Desk4,8004,600File cabinet3,8003,825 Using the above information, what is the depreciable basis that Brittany should use in her business for each asset?
computer - fmv printer - fmv desk - fmv file cabinet purchase price
A small benefit received from working in a company, such as the freedom to make a few personal copies or use the fax machine, is referred to as a: Multiple choice question. de minimis fringe benefit qualified employee discount working condition fringe benefit cafeteria plan
de minimis fringe benefit
Nicole inherited several acres of land upon the death of her grandmother. Nicole's grandmother had owned the land for 20 years and had a basis in the property of $8,000. At the date of death, the land was valued at $38,000. Nicole sold the property eight months after receiving it from the estate. What is the amount of Nicole's basis in the land and her holding period?
heir's basis in property passing from a descendent to the heir is the FMV on the date of the decedent's death. It is always long-term 38000 long-term holding period
For a given before-tax rate of return, the longer the taxpayer defers distributions from a traditional defined contribution plan, the (higher/lower) the taxpayer's after-tax rate of return because deferring the distribution (increases/decreases) the present value of the taxes paid on the distribution. (Enter your answers as higher or lower and increases or decreases.)
higher , decreases
Character of gain/loss
in order to determine how a recognized gain or loss affects ataxpayer's income tax liability, the taxpayer must determinethe character or type of gain or loss recognized.• Ultimately, every gain or loss is characterized as eitherordinary or capital (long-term or short-term). • Gains and losses of different characters are treated differently for tax purposes.
c. Land sold for $45,000
inbetween, then the donee's basis at the time of the sale is set equal to the selling price and the donee does not recognize gain or loss on the sale
Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share). At the time he started working for Cutter Corporation three years ago, Cutter's stock price was $15 per share. Yost exercised all of his options when the share price was $26 per share. Two years after acquiring the shares, he sold them at $47 per share. Note: Input all amounts as positive values. Leave no answer blank. Enter zero if applicable. Required: What are Yost's taxes due on the grant date, exercise date, and sale date, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent? What are Cutter Corporation's tax consequences (amount of deduction and tax savings from deduction) on the grant date, the exercise date, and the date Yost sold the shares? Assume that Yost is "cash poor" and needs to engage in a same-day sale in order to buy his shares. Due to his belief that the stock price is going to increase significantly, he wants to maintain as many shares as possible. How many shares must he sell in order to cover his purchase price and taxes payable on the exercise? Assume that Yost's options were exercisable at $20 and expired after five years. If the stock only reached $18 during its high point during the five-year period, what are Yost's tax consequences on the grant date, the exercise date, and the date the shares are sold, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?
module 10 - 2 1. 3,000 26 - 15 = 11 x 3,000 = 33,00 bargain element x .35 = 11,550 exercise date 141,000 - 78,000 = 63,000 x 15% = 9450 sale date \b. grant date 0 - 0 exercise date amount of deduction was the bargain element and the tax savings was 33,000 x 21% = 6,930 sale date 0-0 c. 11,550 +45,000 = 56,550 / 26 = 2175 d. Yost would not have exercised the options because the market price never exceeded the strike price. As a result, the options would expire unexercised and there will be no tax consequences for either Yost or Cutter.
Steve started Teton Mountaineering Technology (Teton) and determined that he needed machinery and office furniture fora manufacturing facility and a design studio (located in Cody, Wyoming). During 2021, Steve purchased the following assets and incurred the following costs to prepare the assets for business use. His cost basis in each asset is determined as follows: slide 4 -chp 10 lecture
no question
To the extent the maximum deductible IRA contribution is phased out based on MAGI, taxpayers may still make contributions, subject to the allowable overall limit.
nondeductible
The bargain element is taxed as ordinary income on the exercise date for stock options, but NOT for stock options unless specific required holding periods are not met.
nonqualified, incentive
Which of the following assets has a 7-year recovery period for MACRS depreciation?
office furniture and fixes
Three years ago, Katie remodeled her home. Rather than discarding some shelving units that were in her home, she moved them to the employee lounge of the business that she owns. Her original cost (basis) in the shelves was $3,500. The fair market value of the shelves when she converted them to business use was $2,500. Katie has taken depreciation on the shelves of $300. She sold the shelving units this year for $3,600. What is the amount of her basis and the amount of the gain or loss recognized on the sale of the shelves?
og cost > FMV at conversion FMV is the new basis for gain/loss 3200 basia gain 400
onya Jefferson (single), a sole proprietor, runs a successful lobbying business in Washington, DC. She doesn't sell many business assets, but she is planning on retiring and selling her historic townhouse, from which she runs her business, to buy a place somewhere sunny and warm. Tonya's townhouse is worth $1,000,000 and the land is worth another $1,000,000. The original basis in the townhouse was $600,000, and she has claimed $250,000 of depreciation deductions against the asset over the years. The original basis in the land was $500,000. Tonya has located a buyer that would like to finalize the transaction in December of the current year. Tonya's marginal ordinary income tax rate is 35 percent, and her capital gains tax rate is 20 percent. Problem 11-52 Part-a (Static) Required: a1. What amount of gain or loss does Tonya recognize on the sale? a2. What is the character of the gain or loss? a3. What effect does the gain or loss have on her tax liability?
same paper
Similar assets purchased in the same year must be depreciated using the (same/different) depreciation method, but similar assets purchased in different years can be depreciated using (same/different) depreciation methods.
same, different
bonus depreciation percentages
sep 28, 32017 - dec 31, 2022 - 100 percent 2023 80 percent 2024 60 percent 2025 40 percent 2026 20 percent 2027 and after - none
character of assets depending on property use and holding period
short term (one year or less) -ordinary for trade/business/inventory/AR long term (more than 1 year) trade/business - 1231 inventory and AR - ordinary
like-kind and boot calculations
simplified method FMV like0kind property received -deferred gain +deferred loss -basis of like-kind property received method under 1031 adjusted basis of like-kind property surrendered +adjusted basis of boot given +gain recognized -FMV of boot received -loss recognized = -basis of like-kind property received
When depreciating real property under MACRS, the recovery rates are based on the - method.
straight-line
In a direct conversion, where a taxpayer defers the recognition of gain on the exchange of property, the adjusted basis in the property received is equal to the of the property involuntarily converted.
taxpayers basis
special rules relating to cost recovery (179)
• Limits on Immediate expensing (§179) - A phase-out limitation • Businesses must reduce the $1,080,000 maximum available expense dollar-for-dollar for the amount of qualified property placed in service during 2022 over a $2,700,000 threshold .• Thus, if a business places $3,780,000 (2,700,000+1,080,000) or more of tangible personal property into service during 2022, its maximum available§179 expense for the year is $0. - A business's deductible §179 expense is limited to the taxpayer's business income after deducting all expense (including regular and bonus depreciation) except the §179 expense. • The §179 expense cannot create or extend a business's net operating loss.
Personal Property Depreciation
• Personal property includes all tangible property other than real property (e.g., computers, automobiles, furniture, machinery, and equipment) • Depreciation method- Three acceptable methods for depreciating personal property: 200%(double) declining balance, 150% declining balance, and straight-line - Default: 200% declining balance method- Each year, businesses elect the depreciation method for the asset placed in service during that year. (One depreciation method for all similar assets they acquire that year
