STU6 Flashcards
What is the difference between goodwill that is acquired and goodwill that is built by a business owner?
Capital assets include all property held by a taxpayer unless excluded by the IRC. Goodwill is not excluded unless it was acquired in connection with a trade or business. Goodwill acquired is thus treated as amortizable property, which is not a capital asset. Internally generated goodwill, however, is a capital asset.
What is the amount of capital loss deduction allowed for a decedent’s estate and what happens to the capital loss carryover?
Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. However, there can be no carryover from a decedent to his or her estate.
What happens to a nonbusiness bad debt that becomes worthless?
When a nonbusiness bad debt becomes worthless, the loss that results is treated as a short-term capital loss. A nonbusiness bad debt is one that arises other than in connection with a trade or business of the taxpayer.
What is the MACRS deduction for the office building in the current year?
Under MACRS, an office building is nonresidential real estate having a 39-year recovery period and is depreciated using the straight-line depreciation method. Land is not depreciable. Also, the mid-month convention applies.
What is the gain or loss on the disposition of the installment obligation?
Sec. 453B provides that, when an installment obligation is disposed of, gain or loss is recognized to the extent of the difference between the basis of the obligation and the amount realized (or the fair market value of the obligation if disposed of other than by sale or exchange). The adjusted basis of the obligation is equal to the face amount of the obligation reduced by the gross profit that would be realized if the holder collected the face amount [Sec. 453B(b)]
What is the appropriate classification of the gain for tax purposes?
As the property is depreciable, personal, trade or business property, it is subject to the Section 1245 recapture rules. These rules provide that any gain realized, to the extent of the lesser of gain realized or depreciation taken, is characterized as ordinary income. In this case, depreciation exceeds the realized gain, so the entire portion should be characterized as ordinary income.
What is classified as a capital asset?
All property is classified as a capital asset unless specifically excluded. Accounts receivable, inventory, and depreciable property or real estate used in a business are not capital assets. Land held as an investment, however, is a capital asset unless it is held by a dealer (the general rule and not an exception is being tested).
Describe how to depreciate equipment qualified as 5-year property under MACRS and claiming the maximum Sec. 179 deduction for the year?
The deduction for MACRS depreciation is calculated using the 200%-declining-balance method for 5-year property. The basis is reduced by $500,000 (the Sec. 179 deduction for 2014). The half-year convention allows one-half year depreciation in the year of acquisition and one-half year depreciation in the year of disposition
Whats allowable for a Sec. 179 deduction for 2014?
Sec. 179 allows a taxpayer to treat up to $500,000 of the cost of Sec. 179 property acquired in 2014 as an expense rather than as a capital expenditure. There are certain limitations that can reduce the allowable deduction. One limitation is that the amount deductible under Sec. 179 must be reduced by the amount by which the cost of Sec. 179 property placed in service during the year exceeds $2,000,000.
What is the maximum amount of loss on Sec. 1244 stock that can be deducted for the current year?
Up to $50,000 of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss. This limit applies to Sec. 1244 stock held in all corporations.
What amount of gain is recognized when stock acquired from a related party is sold to an unrelated third party?
The realized gain is recognized only to the extent it exceeds a previously disallowed loss.
Real property is purchased in Year 1. In Year 4, the city where the property is located assessed taxes for sidewalks. How should the accrued taxes for this local improvement be treated?
Capitalize the taxes by adding them to the properties adjusted basis. Taxes assessed for local benefit that tend to increase the value of real property, such as sidewalks, are a betterment and are added to the property’s adjusted basis and are not currently deductible as tax expense.
On January 2, Year 1, 7-year MACRS tangible property costing $100,000 was purchased and placed into service. On December 31, Year 3, the property was sold for $102,000, after having taken $47,525 in MACRS depreciation deductions. What amount of the gain should be recaptured as ordinary income?
$47,525 – Depreciable tangible property used in a trade or business is Sec. 1245 property. Sec. 1245 states that gain realized on the disposition of this property is recaptured as ordinary income to the extent of the lesser of depreciation taken or realized gain
How is a capital gain or loss is realized on the sale of a capital asset?
A capital gain or loss is realized on the sale of a capital asset. All property is characterized as a capital asset, unless expressly excluded. Capital assets do not include (1) inventory (or stock in trade), which is property held primarily for sale to customers in the ordinary course of a trade or business, (2) real or depreciable property used in a trade or business, (3) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered, (4) copyrights and artistic compositions held by the person who composed them, and (5) certain U.S. government publications acquired at reduced cost. Land held primarily for investment is a capital asset unless it is subdivided, which allows for it to be treated as converted to property (inventory) held for sale in a trade or business. Bonds and related property are capital assets unless they are dealer property. Government bonds sold by an individual investor (not a dealer) is a capital asset and the sale thereof, resulting in a gain, should be reported as a capital gain. In addition, some property excluded as capital assets may still receive treatment as capital gain under recharacterization rules (e.g., Sec. 1231 assets). Do not allow recharacterization to confuse you. Treatment of Sec. 1231 assets is an issue outside the scope of this question. Being effective at selecting the best answer will result in greater success on the CPA exam.
Which class of employees is exempt from both the minimum wage and maximum hours provisions of the federal Fair Labor Standards Act?
The federal Fair Labor Standards Act (FLSA) provides for equal pay, minimum wages, overtime, and prohibition of child labor. Certain employees are partially excluded from coverage of the act, including administrative personnel (managers, not general office workers) who usually receive some minimum guaranteed annual wage and are required by conditions of their employment to work as long as necessary to accomplish their task.
