Unformatted text preview:

Chapter 11- Character of Gain – part of recognized gaino Ordinaryo Capitalo Personal Use Gains are capital  Losses are not deductibleo Section 1231- Effects of Debt Assumptionso A buyer assuming the debt of a seller will increase the gross sales price (basis)o A seller assuming the debt of a buyer will reduce the gross sales price (basis)- Net capital gains of corporations are treated as ordinary income o Get no preferential treatmento Can only be used to reduce corporate losses- Capital Gain Exclusion of Qualified Small Business Stocko Qualified Small Business Stock – original issue Stock originally issued after August 10, 1993, by a corporation that did not have assets in excess of $50 million after August 10, 1993, and before the stock issuanceo If held for more than 5 years – 50% excluded from taxation If acquired Between Feb. 17, 2009 and Sept. 26, 2010 – 75% excluded If acquired between Sept. 27, 2010 and Jan. 1, 2014 – 100% excluded After exclusion, gain is taxed at 28%- Not eligible for 15% capital gains rateo If sold before owning for 5 years Taxed at 15% capital gains rate but not eligible for exclusion- Planning Strategieso Net Capital Gain Position Reduce the net capital gain by selling capital assets on which there is an unrealized loss Take losses that cancel out the net capital gain to dateo Net Capital Loss Position Take unrealized capital gains to reduce the net capital loss for the year to the $3000 maximum deduction amounto Worthless Securities The loss of investment suffered when a security become worthless (no longer traded, or no value) Taxpayers are deemed to have realized the loss on the last day of the tax year in which the security is determined to be worthless- Also the date for determining holding period The realized loss is equal to the basis of the worthless securityo Basis of Securities Sold When a taxpayer sells only some of the stock owned, the shares being sold mustbe identified if the securities were purchased at different times and at different prices Use FIFO, if unable to determine the specific identification of shares sold The taxpayer can designate which lot of shares is being sold- This helps determine the amount of gain or loss- Section 1231 Gains and Losses – Essay Questiono Section 1231 Property Property held for more than 12 months that is used in a trade or business; timber, coal, and domestic iron ore; livestock that is held for more than one yearand horses that are held for more than 2 years; and unharvested cropso Section 1231 Gain – treated as a long-term capital gaino Section 1231 Loss – treated as an ordinary loss, not capital No deduction limit- Summary of 1231/1245, 1250 Procedures1. Determine if 1231 Property2. For all 1231 property – determine realized and recognized gain/loss3. For all recognized gains, APPLY RECAPTURE RULES – 1245, 1250 = ordinary income/gain4. Apply Netting Procedure- Section 1231 Netting Procedureo Step 1: Net all business casualty gains (after depreciation recapture) and losses- If Loss – all gains and losses are ordinaryo Ordinary loss deduction- If Gain – go to Step 2o Step 2: Net all other Section 1231 gains (after depreciation recapture) and losses (including net casualty gain)- If Loss – all gains and losses are ordinaryo Ordinary loss deduction- If Gain – go to Step 3o Step 3: Apply lookback rule - Nets the current year net Section 1231 gain against any Section 1231 ordinary loss deductions taken in the previous 5 yearso That amount of the gain from netting is treated as ordinary incomeo The rest of the 1231 gain is treated as a net long-term capital gain, and netted with other capital gains and losses- Depreciation Recaptureo As an asset is depreciated, the basis is reduced. When the asset is disposed of, the gain or loss is measured as the difference between the amt. realized and the adj. basis. As a result, some or all, of the gain on the sale derives from depreciation previously deducted on the asseto Depreciation Recapture – giving back the ordinary deduction that created the gain The amount that was deducted for depreciation is reclassified as ordinary income The excess is given capital gain or Section 1231 loss treatmento 2 Provisions Section 1245 Recapture Rule – Full Recapture – all depreciation- No capital gain or Section 1231 treatment results from the sale of a Section 1245 property unless it is sold for more than its original cost- Section 1245 property – all depreciable tangible personal propertyo Eg) autos, trucks, equipment, machinery, computers, patents, copyrights Section 1250 Recapture Rule – Partial Recapture – only to extent of excess depreciation- Only gains that are attributable to excess depreciation above what would have been deducted using straight-line depreciation are recaptured as ordinary incomeo Excess Depreciation – the total depreciation taken to date, less the allowable straight-line depreciation on the asset- No recapture of depreciation occurs when using the straight-line method-- Section 1250 Property – depreciable real property o Eg) office buildings, apartment buildings, warehouses, factories, and low-income housing- Unrecaptured Section 1250 Gaino The amount of gain not otherwise treated as ordinary income that would be ordinary income if the property were Section 1245 property Taxed at 25%- Problems to get to LTCG for 1231 assets1. Recapture depreciation previously deducted Causing gain to be classified as ordinary gain 1245 – Full Recapture – all depreciation as ordinary gain 1250 – Partial Recapture – only excess depreciation over s/l as ordinary2. Gain – after recapture Look back 5 years – any ordinary losses deducted causes ordinary gain  Any gain that is left is

View Full Document

YSU ACCT 4813 - Chapter 11

Documents in this Course
Load more
Download Chapter 11
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...

Join to view Chapter 11 and access 3M+ class-specific study document.

We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 11 2 2 and access 3M+ class-specific study document.


By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?