Question

Pete sells the following capital assets in the 2018:

• • A truck for $10,000 on June 1, 2018. He originally purchased it in 2015 for $12,000 and used it for personal purposes.
• • Shopkins collectables (held for investment) that his daughter told him were rare on September 15, 2018 for $1,000 (he has to pay $100 shipping costs to send the collectables to the buyer). Pete originally purchased the collectables for $5,000 on March 16, 2012.
• • A rental property for $120,000 (he has to pay $10,000 to a realtor as a sales commission) on June 12, 2018. He originally purchased the property for $100,000 on April 12, 2012. All of the gain is unrecaptured Sec. 1250 gain.
• • Coke stock for $5,000 on October 31, 2018 that he originally purchased on February 10, 2017 for $3,000.
• • Nike stock for $6,000 on April 15, 2018 that he originally purchased on January 1, 2018 for $10,000.

a. Calculate the capital gain or loss on each asset and complete the required capital gains netting process. After all netting how will Pete be taxed on the sale of the assets? He has no other sale of capital assets.

b,What if Pete has a long term capital loss carryforward of $15,000? After all netting how will Pete be taxed on the sale of the assets? He has no other sale of capital assets.

Please explain the reasons and use a sheet to solve

Answer 1

Solution.

a. Compute income before income taxes for 2017 and 2018.

Book value
Cost of Truck	31,590
Salvage value	(7,020)
Net Value	24,570
Life	7
Annual Depreciation	3,510

Particulars	2017	2018
Revenue	234,000	234,000
Operating expenses	(152,100)	(152,100)
Opereting profit	81,900	81,900
Depreciation	(3,510)	(3,510)
EBIT	78,390	78,390

b. Compute taxable income for 2017 and 2018.

Year	Book Value	Rate	Depreciation
1	31,590	20%	6,318
2	31,590	32%	10,109
3	31,590	19.20%	6,065
4	31,590	11.52%	3,639
5	31,590	11.52%	3,639
6	31,590	5.76%	1,820
7

Particulars	2017	2018
Revenue	234,000	234,000
Operating expenses	(152,100)	(152,100)
Opereting profit	81,900	81,900
Depreciation	(6,318)	(10,109)
EBIT	75,582	71,791

c. Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.

Book purpose = $3,510 x 7 = $24,570

Tax purpose = $29,770