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R4
REG chapter 4
4
Accounting
Graduate
10/19/2014
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Term

Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?

  a. $0

b. $40,000

c. $100,00

 d. $60,000

 Definition
Choice "d" is correct. Under Sec. 1245, ordinary income is recognized on the gain to the extent of the accumulated depreciation. Any gain in excess of the original cost is capital gain.
Term

Lobster, Inc. incurs the following losses on disposition of business assets during the year:

Loss on the abandonment of office equipment

$25,000

Loss on the sale of a building (straight-line
depreciation taken in prior years of $200,000)

250,000

Loss on the sale of delivery trucks

15,000

What is the amount and character of the losses to be reported on Lobster's tax return?

a.

$40,000 Section 1231 loss, $250,000 long-term capital loss.
b.

$40,000 Section 1231 loss only.
c.

$40,000 Section 1231 loss, $50,000 long-term capital loss.
d.

$290,000 Section 1231 loss.
Definition
Choice "d" is correct. Section 1231 assets are comprised principally of depreciable personal and real property used in the taxpayer's trade or business and held for over twelve months. Trade or business property and capital assets (held over twelve months) that have been involuntarily converted are also included. All of the assets listed in this problem are Section 1231 assets. Net 1231 losses (Sec. 1231 losses less Sec. 1231 gains) are treated as ordinary losses.
Term

Which of the following conditions must be satisfied for a taxpayer to expense, in the year of purchase, under Internal Revenue Code Section 179, the cost of new or used tangible depreciable personal property?

I. The property must be purchased for use in the taxpayer's active trade or business.

II. The property must be purchased from an unrelated party.


a.

I only.
b.

Neither I nor II.
c.

II only.
d.

Both I and II.
Definition

Choice "d" is correct. To qualify for IRC Section 179, the property must be tangible personal property acquired by purchase from an unrelated party for use in the active conduct of a trade or business.

Statements I and II are both correct statements concerning the criteria for property to qualify under IRC Section 179.
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