7-1 Assignment - Property & Asset Transactions PDF

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ACC-330 Federal Taxation I 7-1 Assignment: Property and Asset Transactions (Problem Sets from Chapters 8, 13, & 14)

1. Definitions Match the following terms with the appropriate definition. Click on the term in the left column first and then on the correct definition in the right column. a. Amortization: The allocation (and charge to expense) of the cost or other basis of an intangible asset over a statutory period of 15 years. b. Additional first-year depreciation: Also referred to as bonus depreciation, under this provision taxpayers are allowed to take 100% cost recovery in the year qualified property is placed in service. c. Accelerated cost recovery system (ACRS)/Modified accelerated cost recovery system (MACRS): A method in which the cost of tangible property is recovered over a prescribed period of time. The approach disregards salvage value, imposes a period of cost recovery that depends upon the classification of the asset into one of various recovery periods, and prescribes the applicable percentage of cost that can be deducted each year. d. Alternative depreciation system (ADS): A cost recovery system that produces a small deduction than would be calculated under ACRS or MACRS. e. Cost depletion: This is calculated based on the adjusted basis of the asset. The adjusted basis is divided by the expected recoverable units to determine the rate per unit. 2. Definitions Match the following terms with the appropriate definition. Click on the term in the left column first and then on the correct definition in the right column. a. Half-year convention: A cost recovery convention that assumes all property is placed in service at midyear and thus provides for a half-year’s cost recovery for that year. b. Depletion: The process by which the cost or other basis of a natural resource is recovered upon extraction and sale of the resource. c. Intangible drilling and development costs (IDC): Taxpayers may elect to expense or capitalize these costs incurred in making the property ready for drilling. d. Cost recovery: The portion of the cost of an asset written off under ACRS (or MACRS), which replaced the depreciation system as a method for writing off the cost of an asset for most assets placed in service after 1980. e. Depreciation: The deduction of the cost or other basis of a tangible asset over the asset’s estimated useful life. 3. Definitions Match the following terms with the appropriate definition. Click on the term in the left column first and then on the correct definition in the right column. a. Mid-quarter convention: A cost recovery convention that assumes property placed in service during the year is placed in service at the middle of the quarter in which it is actually placed in service. b. Residential rental real estate: Buildings for which at least 80 percent of the gross rents are from dwelling units (e.g., an apartment building).

c. Listed property: Includes (1) any passenger automobile, (2) any other property used as a means of transportation, (3) any property of a type generally used for purposes of entertainment, recreation, or amusement, (4) any other property of a type specified in the Regulations. d. Mid-month convention: A cost recovery convention that assumes property is placed in service in the middle of the month that it is actually placed in service. e. Percentage depletion: Is based on a statutory percentage applied to the gross income from the natural resource property. 4. Exercise 8-21 (Algorithmic) (LO. 2) Euclid acquires a 7-year class asset on May 9, 2019, for $232,900 (the only asset acquired during the year). Euclid does not elect immediate expensing under § 179. He does not claim any available additional firstyear depreciation. If required, round your answers to the nearest dollar. Calculate Euclid’s cost recovery deduction for 2019 and 2020. 2019: $33,281 2020: $57,037 Calculations:

$232,900 x 14.29% = $33,281.41  $33,281 $232,900 x 24.49% = $57,037.21  $57,037

5. Exercise 8-23 (LO. 2) Lopez acquired a building on June 1, 2014, for $1,000,000. Compute the depreciation deduction assuming the building is classified as (a) residential and (b) nonresidential. If required, round your answers to the nearest dollar. a. Calculate Lopez’s cost recovery deduction for 2019 if the building is classified as residential rental real estate. $36,360 b. Calculate Lopez’s cost recovery deduction for 2019 if the building is classified as nonresidential real estate. $25,640 Calculations:

$1,000,000 x 3.636% = $36,360 $1,000,000 x 2.564% = $25,640

6. Exercise 8-24 (LO. 2) Andre acquired a computer on March 3, 2019, for $2,800. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Calculate Andre’s cost recovery deduction for the computer for tax years 2019 and 2020. 2019: $280 2020: $560 2019: 2020:

$2,800 x 10% = $280 $2,800 x 20% = $560.

7. Tax Drill – Section 179 For his business, McKenzie purchased qualifying equipment that cost $212,000 in 2019. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. If an amount is zero, enter “0”. a. McKenzie’s § 179 expense deduction is $5,600 for 2019. His § 179 carryover to 2020 is $206,400. Calculation:

$212,000 – 5,600 = $206,400

b. How would your answer change if McKenzie decided to use additional first-year (bonus) depreciation on the equipment? McKenzie’s § 179 expense deduction is $0 for 2019. His § 179 carryover to 2020 is $0.

8. Tax Drill – Section 121 Indicated whether the following statements are “True” or “False” regarding the tax treatment of the sale of a personal residence. a. The § 121 exclusion does not apply to sales occurring within two years of its last use. True b. A realized loss from the sale of a personal residence is recognized for tax purposes. False c. To qualify for exclusion treatment, at the date of the sale, the residence must have been owned and used by the taxpayer as the principal residence for at least two years during the five-year period ending on the date of the sale. True d. Generally, the amount of the available § 121 exclusion on the sale of a principal residence is $250,000 for a taxpayer. True 9. Definitions (LO. 1, 2, 3, 4) Match the following terms with the appropriate definition. Click on the term in the left column first and then on the correct definition in the right column. a. Fair market value: The amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. b. Adjusted basis: The cost or other basis of property reduced by depreciation (cost recovery) allowed or allowable and increased by capital improvements. c. Amount realized: This amount is the sum of the cash and the fair market value of any property or services received, plus any related debt assumed by the buyer. d. Goodwill: The ability of a business to generate income in excess of a normal rate on assets due to superior managerial skills, market position, new product technology, etc. e. Holding period: It is crucial in determining whether gain or loss from the sale or exchange of a capital asset is long term or short term. 10. Definitions (LO. 1, 2, 3, 4) Match the following terms with the appropriate definition. Click on the term in the left column first and then on the correct definition in the right column. a. Wash sale: A loss from the sale of stock or securities that is disallowed because the taxpayer, within 30 days before or after the sale, acquired stock or securities that are substantially identical to those sold. b. Realized gain or loss: The difference between the amount realized upon the sale or other disposition of property and the adjusted basis of the property. c. Recovery of capital doctrine: When a taxable sale or exchange occurs, the seller may be permitted to recover his or her investment (or other adjusted basis) in the property before gain or loss is recognized. d. Recognized gain or loss: The portion of realized gain or loss that is considered in computing taxable income. 11. Tax Drill – Realized Gain or Loss on Property Dispositions Indicate whether the following statements are “True” or “False” regarding property dispositions. a. Only sales of property are considered dispositions for tax purposes. False b. The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of other property received. True

c. The fair market value of property received in a sale or other disposition has been defined by the courts as the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy. True d. Capital additions decrease and recoveries of capital increase the original basis so that on the date of disposition, the adjusted basis reflects the unrecovered cost or other basis of the property. False e. The amount of realized also includes any liability on the property disposed of, such as a mortgage debt, if the buyer assumes the mortgage or the property is sold subject to the mortgage. True 12. Tax Drill – Realized vs. Recognized Gains and Losses Complete the following statements regarding gains and losses. Recognized gain is the amount of the realized gain that is included in the taxpayer’s gross income. A recognized loss, on the other hand, is the amount of a realized loss that is deductible for tax purposes. A loss from the sale, exchange, or condemnation of personal use assets is generally nondeductible for tax purposes. Any gain from the sale or other disposition of personal use assets is generally taxable. 13. Discussion Question 13-6 (LO. 4) On July 16, 2019, Logan acquires land and a building for $500,000 to use in his sole proprietorship. Of the purchase price, $400,000 is allocated to the building, and $100,000 is allocated to the land. Cost recovery of $4,708 is deducted in 2019 for the building (nonresidential real estate). a. What is the adjusted basis for the land and the building at the acquisition date? Land $100,000 Building $400,000 b. What is the adjusted basis for the land and the building at the end of 2019? Land $100,000 Building $395,292 Calculation:

$400,000 - $4,708 = $395,292

14. Discussion Question 13-12 (LO. 3) Thelma inherited land from Sadie on June 7, 2019. The land appreciated in value by 100% during the six months Sadie owned it. The value has remained stable during the three months Thelma has owned it, and she expects it to continue to do so in the near future. Although she would like to sell the land now, Thelma has decided to postpone the sale for another three months. The delay is undertaken to enable the recognized gain to qualify for long-term capital gain treatment. For inherited property, Thelma’s holding period is automatically long-term. Therefore, if she sells the property now, it will be treated as a long-term capital gain or loss. 15. Problem 13-57 (LO. 3) Margo receives a gift of real estate with an adjusted basis of $175,000 and a fair market value of $100,000. The donor paid gift tax of $15,000 on the transfer. If an amount is zero, enter “0”. Margo’s basis for a gain is $175,000 and her basis for loss is $100,000. If Margo later sells the property for $110,000, her recognized gain or loss is $0.

16. Definitions Match the following terms with the appropriate definition. Click on the term in the left column first and then on the correct definition in the right column. a. Alternative tax: An option that is allowed in computing the tax on net capital gain. b. Capital gain: The gain from the sale or exchange of a capital asset. c. Capital asset: Broadly speaking, includes all assets except those specifically excluded by the Code. d. Collectibles: A special type of capital asset, the gain from which is taxed at a maximum rate of 28 percent if the holding period is more than one year. e. Capital loss: The loss from the sale or exchange of a capital asset. 17. Definitions Match the following terms with the appropriate definition. Click on the term in the left column first and then on the correct definition in the right column. a. Section 1245 property: Property that includes tangible personal property, such as furniture and equipment, that is subject to depreciation, or intangible personal property, such as a patent or license, that is subject to amortization. b. Intangible drilling and development costs (IDC): Taxpayers may elect to expense or capitalize (subject to amortization) these costs. c. Section 1231 lookback: To the extent of non-recaptured § 1231 losses for the five prior tax years, the gain is classified as ordinary income. d. Section 1231 property: Depreciable assets and real estate used in a trade or business and held for the required long-term holding period. Net gain from this type of property is sometimes treated as a longterm capital gain. 18. Tax Drill – Capital Gain and Loss Requirements Indicate whether the following statements are “True” or “False” regarding taxation for capital gains and losses. a. The long-term holding period is more than one year. b. The three possible tax statuses are capital asset, § 1231 asset, or ordinary asset. c. Property disposition may only be by sale or exchange.

True True False

19. Tax Drill – Identify Capital Assets Indicate whether the following assets are capital assets. Select “Yes” or “No”, whichever is applicable. a. Personal residence b. Inventory c. Investments in mutual funds d. Depreciable property or real estate used in a business e. Artistic compositions held by a taxpayer whose efforts created the property

Yes No Yes No No

20. Tax Drill – Ordinary vs. Capital Assets Complete the following statements regarding the appropriate tax treatment for each sale. 1. Tobo Company buys and sells computers. Any gains from the sale of the computer are ordinary gains. 2. Masahiko sells his personal computer at a $500 gain. Masahiko’s gain is a capital gain.

3. Picco Company has accounts receivable of $50,000. Because Picco needs immediate cash, it sells the receivables for $40,000 to a financial institution. If Picco is a cash basis taxpayer, it has $40,000 of ordinary income....