R2 M2 - Gains and Losses Flashcards
(13 cards)
The capital loss deduction is limited to $3,000per year with the excess carried forward indefinitely, there is no carry back allowed.
What is nonrecourse?
means if you default you can only go after that collateral nothing else. (
Johnson borrowed $45,000 secured by land with a basis of $20,000. Johnson could not pay the principal, so the bank foreclosed and sold the land for $35,000 as full settlement of the debt. What income should Johnson recognize?
A. $10,000 B. $15,000 C. $25,000 D. $35,000
Explanation
Choice “C” is correct. Foreclosure of property with a nonrecourse, secured loan is treated as a sale of the property. It is not cancellation of debt (COD) income because the debtor is not personally liable for the debt. The amount realized is the amount of the debt immediately prior to the foreclosure. Gain recognized = $45,000 outstanding debt balance − $20,000 basis = $25,000.
Choice “A” is incorrect. The gain recognized is $25,000, which is the $45,000 outstanding debt balance less the $20,000 basis.
Choice “B” is incorrect. The gain recognized is $25,000, which is the $45,000 outstanding debt balance less the $20,000 basis. The amount realized is the $45,000 outstanding debt balance, not the $35,000 price for which the bank sold the land.
Choice “D” is incorrect. The gain recognized is $25,000, which is the $45,000 outstanding debt balance less the $20,000 basis.
Capital Assets
- Investment (stocks, bonds, virtual currency); or
- Personal use (personal car, home , furniture)
Disposition of capital assets are taxed as capital gain/losses
Noncapital Assets
- held for sale to customers in the ordinary course of business (inventory); or
- Account receivable arising from the sale of inventory or business services or
- Used in a taxpayer’s trade or business (real property
Disposition of noncapital assets are taxed as ordinary income
Nonbusiness bad debt is not deductible. A nonbusiness bad debt is treated as a short-term capital loss in the year the debt is deemed worthless.
Aqua Corp. had an operating income of $500,000 and operating expenses of $350,000 in the current year. Aqua had a long-term capital gain of $30,000 and a $50,000 short-term capital loss. What is Aqua’s taxable income for the current year?
A. $130,000 B. $147,000 C. $150,000 D. $180,000
Explanation
Choice “C” is correct. Aqua Corp.’s operating income of $500,000 and operating expenses of $350,000 are both taken into account in determining its taxable income for the year, but its net capital loss of $20,000 ($50,000 capital loss netted against the $30,000 capital gain) is not currently deductible. Instead, it is carried back three years and forward five years to be used against net capital gains generated in those years. Thus, Aqua Corp.’s taxable income is simply the $500,000 of operating income minus the $350,000 of operating expenses, or $150,000.
Choice “A” is incorrect. Net capital losses incurred by a corporation are not currently deductible but instead are carried back three years and forward five years. Thus, Aqua Corp.’s net capital loss of $20,000 is not deductible in the current year.
Choice “B” is incorrect. The rule that up to $3,000 of net capital losses may be deducted against ordinary income is only applicable to individual taxpayers, not to corporations. Therefore, none of Aqua Corp.’s net capital loss is deductible in the current year.
Choice “D” is incorrect. Corporations are allowed to deduct capital losses to the extent of capital gains. So, $30,000 of Aqua Corp.’s capital loss may be deducted against the $30,000 of Aqua Corp.’s capital gain.
Explanation
Choice “A” is correct. The net capital loss for the year is $48,000. None of that loss is currently deductible against ordinary income. It can be carried back three years and forward five years to offset net capital gains in other years.
Choice “B” is incorrect. $3,000 is the deductible amount of capital loss against ordinary income for an individual, not a corporation.
Choice “C” is incorrect. $12,000 is just the net long-term capital loss.
Choice “D” is incorrect. $48,000 is the net capital loss, but it is not deductible against ordinary income.
Baker Corp., a calendar year C corporation, realized taxable income of $36,000 from its regular business operations for the calendar year. In addition, Baker had the following capital gains and losses during the year.
Short-term capital gain 8,500
Short-term capital loss (4,000)
Long-term capital gain 1,500
Long-term capital loss (3,500)
Baker did not realize any other capital gains or losses since it began operations. What is Baker’s total taxable income for the year?
A. $46,000 B. $42,000 C. $40,500 D. $38,500
Explanation
Choice “A” is correct. In Year 1, no sale of stock occurred so there would be no loss. In Year 2, there is a $2,000 loss realized ($15,000 basis less $13,000 received), but it is not deductible because it is a wash sale. A wash sale occurs when a taxpayer sells stock at a loss and invests in substantially identical stock within 30 days before or after the sale. In this case, Smith reinvested in an additional 100 shares four days prior to selling 100 shares of the same stock at a loss. The $2,000 disallowed loss would, however, increase the basis of the new shares by $2,000.
Choice “B” is incorrect. The $2,000 loss realized in Year 2 is disallowed under the wash sale rules.
Choice “C” is incorrect. In Year 1, there is no loss since no shares were sold. In Year 2, the $2,000 loss is disallowed under the wash sale rules.
Choice “D” is incorrect. In Year 1, there is no possible loss since no shares were sold.
Net capital gain is added in ordinary income for Corporation.
What is the basis of the new shares your purchased?
Basis of the repurchased security = Purchase of the shares + Disallowed loss on wash sale
Realize vs Recognized
Recognized does not have to be reported in your taxes
Nondeductible loss
Wash sale, personal loss and related party transaction.
Rick purchased 100 shares of XYZ stock on April 4, Year 4, for $8,600. He sold 50 shares on February 8, Year 5, for $3,000. He then bought another 50 shares of XYZ on March 1, Year 5, for $3,200. How much loss will Rick realize in Year 5?
A. $5,600 B. $3,000 C. $0 D. $1,300
Choice “D” is correct. Rick sold half of the original shares for $3,000. The cost of those shares is $4,300, half of the original purchase price. The realized loss is $1,300 ($3,000 – $4,300).
Choice “A” is incorrect. $5,600 would be the recognized loss if all of the shares were sold for $3,000. But only half of them were sold.
Choice “B” is incorrect. $3,000 is the proceeds of the sale.
Choice “C” is incorrect. Zero is the recognized loss due to the wash sale rules, not the realized loss.
Realized —> ($1,300)
Recognized is the real deal –> zero
Worker’s compensation payment is nontaxable = injury on the job ( physical injuries)
Unemployment compensation is ** taxable**
Choice “A” is correct. The taxpayer’s adjusted gross income (AGI) is $120,000, which consists of the $80,000 wages and the $40,000 damages received for slander. Compensation for services and damages received for nonphysical injury, such as slander, are included in taxable gross income. Workers’ compensation payments are excluded from taxable gross income and the loss on the sale of a personal residence is a nondeductible personal loss.
Choice “B” is incorrect. AGI of $110,000 incorrectly includes $80,000 wages and $30,000 workers’ compensation payments. Both the wages and the damages award are included in taxable gross income but the workers’ compensation payments are excluded from taxable gross income. The loss on the sale of a personal residence is a nondeductible personal loss.
Choice “C” is incorrect. AGI of $147,000 incorrectly includes $80,000 wages, $40,000 damages award, and $30,000 workers’ compensation payments, reduced by $3,000 of the loss on the sale of a personal residence. Both the wages and the damages award are included in taxable gross income but workers’ compensation payments are excluded from taxable gross income. Although up to $3,000 of a net capital loss can be deducted each year, a loss on a personal residence is a nondeductible personal loss, not a capital loss.
Choice “D” is incorrect. AGI of $107,000 includes $80,000 wages and $30,000 workers’ compensation payments, reduced by $3,000 of the loss on the sale of a personal residence. Although up to $3,000 of a net capital loss can be deducted each year, a loss on the sale of a personal residence is a nondeductible personal loss, not a capital loss. Both the wages and the damages award are included in taxable gross income but workers’ compensation payments are excluded from taxable gross income.
