Tax Test 2 Review

Tax Test 2 Review - Tax Test 2 Review Chapters 8,9, 14-17...

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Tax Test 2 Review Chapters 8,9, 14-17 Chapter 8 Capital losses can only be deducted against capital gains, whereas ordinary losses are fully deductible against any type of income. For sales of business assets, the ultimate character of gain or loss is controlled by Section 1231. The IRC specifies that gross income includes “gains derived from dealings in property” and allows a deduction for “any loss sustained during the taxable year and compensated for by insurance or other means. Owners of appreciated property can defer gain recognition and the related tax cost for as long as they hold the property. Owners of devalued property can accelerated the deduction of loss and the related tax savings by disposing of the property as soon as possible. Tax basis encompasses both the owner’s equity in the property and any debt to which the property is subject. If the owner sells the property and is relieved of debt in the transaction, the owner must include the debt relief in the amount realized on sale. On a sale or exchange of property, only the excess of the amount realized over adjusted basis is taxable income. Accordingly, seller recovers their investment in the property at no tax cost. If a seller realizes a loss on a sale or exchange, the entire amount realized is a tax-free recovery of the seller’s investment. Moreover, the seller may be allowed to deduct to unrecovered investment (realized loss) in the computation of taxable income. Taxpayer can use the installment sale method to defer gain recognition on the sale of many types of business and investment property. The installment sale method does not apply to gains realized on the sale of stocks or securities traded on an established market nor gains realized on the sale of inventory to customers in the ordinary course of the sellers business. Under GAAP, the installment sale method generally results in a favorable temporary difference. When a seller receives the purchaser’s note in a seller financed sale, the seller generally takes a basis in the note equal to its face value. This basis represents the dollars that the seller will recover as tax free principal payments. In the case of an installment sale, the seller is not entitled to a tax-free recovery of the dollars represented by the purchaser’s note. Instead the seller will recognize a percentage of every dollar received as taxable
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income. Consequently, the seller’s tax basis in the installment note is reduced by the deferred gain represent by the note. If a taxpayer converts a note receivable to cash the taxpayer must immediately recognize any deferred gain represented by the note. A net capital loss incurred by an individual is carried forward indefinitely. In any future year in which the individual recognizes net capital gain the loss carryforward is deductible to the extent of such gain. A net capital loss incurred by a corporation is carried back 3 years and forward 5 years
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This note was uploaded on 08/08/2011 for the course ACCT 3843 taught by Professor Kaden during the Spring '09 term at Arkansas.

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Tax Test 2 Review - Tax Test 2 Review Chapters 8,9, 14-17...

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