Inventory or accounts receivable short term 12 months

This preview shows page 10 - 17 out of 37 pages.

Inventory or accountsreceivableShort-term (<12 months)OrdinaryShort-term capitalOrdinaryLong-term (>12 months)Sec. 1231Long-term capitalOrdinaryOrdinaryCapitalOrdinary LossLT Capital Gain15%/20%Preferential RateCan be used to offsetCapital LossesJust individualsTax Treatment
Depreciation recapture11Occurs when you sell Sec. 1231 property for a gainNotrelevant if there is a loss!!!!Recharacterize what would otherwise be §1231 gain as ordinaryincome up to the amount of depreciation claimed on the propertyDoesnotchange the amount of gain recognized.Only changes thecharacterof some or all of the gain.Two main types:§1245 Property:(1) Depreciable tangible personal property and (2)amortizable intangible property§1250 Property: Tangible real property (buildings)
Depreciation recapture12For tangible personal property and amortizable intangibleproperty (§1245 property):Depreciation recapture rule:The first portion of the gain equal to thelesser of:the full recognized gain ORthe total accumulated depreciationis treated as ordinary income.The remaining portion of the gain is treated as §1231 gain.WHAT AMOUNT IS RECAPTUREDAS ORDINARY?MAX = TOTAL GAINMIN = DEPRECIATION DEDUCTIONSCLAIMED ON THE PROPERTYANY REMAINDER IS §1231 GAIN.CAPITAL GAINUNLESS §1231 LOOK-BACK RULEAPPLIES
Depreciation recaptureFor tangible real property (§1250 property):Depreciation recapture rule (only need to know a limited number ofrules):Primarily relevant now forcorporatetaxpayers via Sec. 291depreciation recapture.Recapture as ordinary income20%of thelesser of:the full recognizedgain OR the accumulated depreciationTreat the remainder of the gain (if any) as Sec. 1231 gain.Forindividuals, just treat like any other Sec. 1231 asset being soldwithout depreciation recapture.However, while there is no depreciation recapture, the portion that would berecaptured (lesser of the recognized gain or accumulated depreciation) gets a25% tax rate and only the remainder gets the favorable long-term capital gainsrate.
13
Depreciation recapture14Other notes on depreciation recapture:Sec. 1239:Just know that there are limitations on capital and Sec. 1231 gaintreatment (as opposed to ordinary income treatment) when thedisposition involves a related party.No calculations with regard to this limitation.
§1231 Netting Process:If more than one §1231 asset is sold during the year:151. Classify assets andnet the gains andlosses•Apply depreciationrecapture whererelevant to each §1231asset sold.•Net all the remaining§1231 gains fromassets with any §1231losses.2. If there is a net§1231 loss:Stop here and treat asanordinary loss3. If there is a net §1231 gain:•Remainder is treated aslong-term capital gain-Net with taxpayer’s othercapital gains and losses-Net long-term capital gainis eligible for preferentialcapital gain rates•Apply the §1231look-backruleto reclassify a portionof the net §1231 gain asordinary income-Did the taxpayer deduct§1231 losses in the last5 years?
§1231 Look-Back Rule16Look-back rule5 YEARS

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture