Chapter 7 Notes - Capital recoveries Depreciation and cost...

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Capital recoveries Depreciation and cost recovery allowances : The amount of depreciation that is subtracted from the original basis is the greater of the allowed or allowable depreciation calculated on an annual basis (usually, allowed and allowable are the same) Casualties and thefts : Adjusted basis is reduced by the amount of insurance proceeds received; may result in a gain instead of a loss which would increase the adjusted basis Example: Osprey, Inc. owned an insured truck that was destroyed in an accident. The adjusted basis and fair market value of the truck were $6,500 and $8,000. Osprey received insurance proceeds of 8,000. The amount of the casualty gain is 1,500 (8,000 insurance proceeds – 6,500 adjusted basis). The adjusted basis is increased by the 1,500 casualty gain and is reduced by the 8,000 of insurance proceeds received (6,500 +1,500 – 8,000= 0 basis). Capital recoveries : A corporate distribution to a shareholder that is not taxable is treated as a return of capital , and it reduces the basis of the shareholder’s stock in the corporation Amortized bond premium: The basis in a bond purchased at a premium is reduced by the amortizable portion of the bond premium The amount of the amortized premium on taxable bonds is permitted as an interest deduction (it’s really an advance or payback of interest to the seller, thereby reducing the effective yield of the bond) Taxpayer may elect to amortize the bond premium If bonds tax exempt, amortization mandatory but no deduction Realized gain/loss is the difference between the amount realized upon the sale or other disposition of property and the adjusted basis of the property
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