Question

.Kara sells a piece of construction equipment used in her excavation business (a sole proprietorship) in 2018. The equipment had an initial cost of $86,000 in 2016, and she has taken $70,000 in cost recovery via depreciation on the equipment. Kara sells the equipment for $96,000. What is the AMOUNT and CHARACTER of Kara’s gain or loss for 2018 assuming no 1231 losses were deducted in the past five years? (10 points)

b.Refer to part a. Kara had the following net Section 1231 results for each of the years shown. What amount of Kara’s gain(s), from part a, will be taxable as a capital gain in 2018? (5 points)

Tax Year                     Net 1231 Loss             Net 1231 Gain

                                    2013                            $18,000

                                    2014                            $33,000

                                    2015                            $12,000

2016                                                                $41,000

2017                                                                $20,000

c.In addition to the gain on the construction equipment in parts a and b, Kara has the following capital gains and losses: A $3,000 STCG, a $4,000 LTCG, a $12,000 STCL, and a Collectibles gain of $15,000. Including any gain on the construction equipment taxable as a capital gain from part b, what net capital gain(s) or loss(es) does Kara report on her 2018 tax return? Be as specific as possible. (10 points)

d.Explain how depreciation recapture under IRC 1245 and 1250 can be described as an equitable, or “fair,” treatment to taxpayers. (HINT: Think about marginal tax rates) (5 points)

Answer 1

a.

		Amount in $
Sale value of the equipment		96000
Less: Un depreciated value of the equipment
Initial purchase cost at 2016	86000
Depreciationed value of the equipment	-70000	16000
Income taxable under capital gain		80000
The above income is considered as CAPITAL GAIN. It falls under section 1231 rules and in this case the gain is not taxed as ordinary income but at a lower capital gain rates

b. Net capital Loss up to Tax Year 2015 $ 63000

( 18000+33000+12000)

Less: Capital gain for tax year 2015 & 2017 $ 61000

Balance Loss to be adjusted 2000

Capital Gain for 2018 $ 80000

TAXABLE CAPITAL GAIN FOR TAX YEAR 2018 $ 78000