T11F-Chp-11-3A-Depreciation Recapture Review etc

T11F-Chp-11-3A-Depreciation Recapture Review etc - Extra...

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Recapture 1 Extra Recapture Materials. Property Transactions: § 1231 and Recapture Provisions
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Recapture 2 Note from Instructor-1 Capital losses can be deducted from capital gains, if you have capital gains. It is critical for us to understand that capital loss deductions (from ordinary income) are limited to $3,000 per year for individuals and to zero for corporations . In a depression , a corporation may need to sell (or abandon) excess factories and equipment. If the loss on the sale is subject to the capital loss limit, the deduction is of no value during a depression.
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Recapture 3 Note from Instructor-2 Therefore, the corporation wants production assets to be classified as ordinary assets (not capital assets) so the loss on the sale can be deducted, possibly creating a net operating loss to be carried back to another year-resulting in a refund of back taxes and a source of much needed cash. So, businesses want buildings and equipment to be “non” capital assets.
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Recapture 4 Note from Instructor-3 The situation changes in boom times when equipment is being sold at a gain. Then, individuals want such assets to be classified as capital assets so they can take advantage of the 15% maximum rate on capital gains. Corporations want the assets to generate capital gains because they may have accumulated capital losses that will offset the capital gains.
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Recapture 5 Note from Instructor-4 Congress has listened to the lobbyists, and showed their appreciation for the campaign contributions. Buildings and equipment used in a business, as well as land, are not capital assets. (Sec. 1221) However, if you have net gains from the sale of these assets you are allowed to “pretend” the assets are capital assets, and report the gains as capital gains. (Sec. 1231)
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Recapture 6 Note from Instructor-5 This creates a loophole. Buy a $400,000 machine. Depreciate it very fast – claiming deprec. of say $100,000. That leaves a book value of $300,000. Now lets assume you sell it for $400,000.
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T11F-Chp-11-3A-Depreciation Recapture Review etc - Extra...

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