Ch11 Slides.pdf - Todayu2019s Agenda Recap u2022 Cost...

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Today’s Agenda Recap Cost Recovery Depreciation Depletion Amortization Types of Depreciation Section 179 Bonus depreciation MACRS Today Ch11 – Property Dispositions Next Class Review 1) Section 179 2) Bonus depreciation i. Type of Property ii. Convention iii. Depreciable amount iv. Cost recovery year 3) MACRS computation Determines MACRS Table
Chapter 11: Property Dispositions INSTRUCTED BY: COLLEEN GREEN
Outline 3 Today Revisiting a few terms for disposition calculations General rule: must recognize all realized gain/loss from a disposition Determining asset character and why that matters Each Sec. 1231 asset depreciation recapture All Sec. 1231 assets netting process Exceptions to the general recognition rule
Related Tax Form 4 Form 4797
Revisiting some terminology 5 Gain/(loss) Amount Realized (AR) Adjusted Basis (AB) = Initial basis – Cost Recovery Cash received + Debt relief + FMV property received – Seller’s expenses incurred to sell property = Acquisition cost + sales taxes + delivery + installation… = Total accumulated depreciation (usually)
Types of disposition 6 Sale Donation Trade (“exchange”) for a similar asset Abandon or sent to trash or recycling Destruction outside the taxpayer’s control How does recognizable gain/(loss) differ from realizable gain/(loss)? Transactions that trigger realized gain/(loss):
When AB calculation is different 7 Gifts Inherited property Property converted from personal use to business use
What are “assets used in a trade or business”? Depreciable property Machinery, equipment, furniture, vehicles… Land What kind of asset is it? Character determines tax treatment. 8 Disadvantage Ordinary income/gain taxed at ordinary rates Advantage Ordinary loss offsets other ordinary income Disadvantage Limits on deductibility of capital losses Advantage Capital loss offsets capital gain + favorable tax rates on capital gains (individuals) Net gain = Capital Net loss = Ordinary Assets used in a trade or business > 1yr §1231 Not Capital (1)Inventory (2)Assets used in a trade or business < 1 year Capital (§1221) Stocks, bonds, personal car, house, computer… §1231 “magic” Best of both worlds
Character of a gain or loss from disposition: Capital gains and losses 9 SUMMARY TABLE ON DIFFERENCES IN TREATMENT OF CAPITAL GAINS AND LOSSES FOR TWO TYPES OF TAXPAYERS (WHAT TO KNOW FROM EXHIBIT 11-4 IN BOOK): Taxpayer Type Preferential Rates Loss Limitations Individuals Net long-term capital gains for high (low) taxable income taxpayer 20% (15%) Can deduct up to $3,000 of net capital losses against ordinary income. Then carryforward the rest indefinitely. Corporations No preferential rate, gets ordinary tax rate. Cannot offset ordinary income with net capital losses. Only offset capital gains. Carryback remainder 3 years and forward 5 years. If not used up, expires.
Character of a gain or loss from disposition (Before Recapture and Look-Back Rules) 10 The character is determined based on the holding period and use of the asset. Holding Period Property Use Trade or business Investment or personal- use assets

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