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BA 128A-1 agenda 4/5. Questions from lecture Review session - Wednesday Review Chapter 13, 14 Assignment I13-32,34, I14-42 Additional assignment - I13- 38,43,48 I14-44,48. Chapter 13. Section 1231 - treatment of character of gains and losses

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Ba 128a 1 agenda 4 5 l.jpg

BA 128A-1 agenda 4/5

  • Questions from lecture

  • Review session - Wednesday

  • Review Chapter 13, 14

  • Assignment I13-32,34, I14-42

  • Additional assignment - I13- 38,43,48 I14-44,48


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Chapter 13

  • Section 1231 - treatment of character of gains and losses

  • Section 1245 - depreciable personal property + limited nonresidential real property (depreciation recapture)

  • Section 1250 - real property - excess depreciation

  • Section 1250 recapture - all st. line depreciation recapture at 25% LTCG


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Section 1231

  • What kind of assets

    • real property/depreciable property used in trade/business that’s held for > 1 yr

    • timber coal, domestic iron ore

    • livestock

    • unharvested crops

  • What is not - inventory, US government publications not purchased at regular sales price, copyright/literary, musical or artistic compositions

  • Involuntary conversions - only property used in trade/business held over a year - only gains applied

  • Condemnation - property must be held for over a year and in connection with trade/business or with a transaction entered into for profit.


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Section 1231 continue

  • Net section 1231 gains and losses

  • If gain -> LTCG

  • If loss -> ordinary loss

  • exception- Casualty loss - if loss > gain, non section 1231 ordinary loss, if gain> loss, section 1231 gain

  • Subject to 5 year look back rule - ordinary loss in the past five years needs to be recaptured as ordinary income instead of capital gain - loss recaptured apply to net 1231 gain in the 25% group first and then the 20% group


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Section 1231 netting procedure

  • Determine casualty gains and loss

    • if loss -> non 1231 loss - business casualty loss is a for AGI deduction, personal casualty loss is a from AGI (itemized deduction)

  • Compute net 1231 gains/loss

    • net casualty gain

    • gains and losses from sale/exchange of section 1231 property

    • gains and losses from condemnation of property

  • If net 1231 gain, check unrecaptured 1231 loss from previous years


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Section 1245

  • Apply only to gains on disposition on property

  • Depreciation recapture as ordinary income

  • cannot exceed amount of realized gain

  • 1245 property

    • property subject to depreciation and amortization besides real property

      • applies mostly to depreciable personal property

      • property under section 179

      • exception nonresidential real estate placed in service between 1981-1986 that used ACRS accelerated cost recovery method instead of straight. line

  • Why depreciation recapture?


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Section 1250

  • Includes most depreciable real property except nonresidential real estate placed in service between 1981-1986, low income housing and depreciable residential rental property. Section 1250 usually applies to real estate place in service before 1986 straight line is used after 1986

  • Low income housing - addition depreciation for this kind of housing placed in service after 1975, recapture is reduced 1% for each month held longer than 100 months

  • Recapture only the additional depreciation over straight line into ordinary income

  • Unrecapture 1250 gain - all of the rest of the depreciation (ie straight line) will be recaptured at long term capital gain rate of 25% instead of 20%


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Other recapture provisions

  • Corporations - addition section 291 for rule 1250 for depreciable real estate, addition recapture amounts - 20% of difference between 1250 recapture amounts and 1245 recapture amounts

  • Gifts - no recapture at transfer, recapture carry over to donee

  • Transfer at death - no recapture carry over

  • Like-kind exchange, recapture potential is carried over to replacement property

  • Involuntary conversion - if gain is not recognized, section 1245 recapture is only limited to the sum of recognized gain or the FMV of acquired property that is not 1245 property, same for 1250 provision


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Other recapture provisions

  • Installment sales - recaptured gain is taxed in the year of sale even payment is not received

  • Section 179 - if convert to personal use assets later, part of the amount of 179 ($18500) is recaptured as ordinary income for the ordinary depreciation is not normally taken

  • Conservation and land clearing expenditures recaptured if farmland is disposed of before a holding period of 10 years

  • Intangible drilling costs and depletion - recaptured if oil and gas property is sold

  • Related party sales - ordinary gain if the property is subject to depreciation in the hands of the transferee


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Chapter 14

  • Alternative Minimum Tax computation

  • Self employment tax

  • Payment of taxes


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AMT

  • Taxable income

    plus tax preference items

    plus personal and dependency exemption

    plus standard deduction if itemized deductions is not used

    plus adjustments - disallowed itemized deductions, timing difference adjustments, disallowed AMT tax credits

    = AMTI

    - AMT exemption - 45000 for married filing jointly, 33750 for single tax payers - subject to phase out 25% for AMTI > 150000 for married filing jointly and 112500 for single

    = AMT Base

    Tax rate = 26% for the first 175000

    28% for amount >175000

    = Tentative minimum tax

    - regular tax

    = AMT


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Tax preference items

  • Excess of ACRS accelerated depreciation over straight line for real property place in service before 1987

  • Tax exempt interest on certain private activity bonds

  • exclusion of gain on the sale of certain small business stock


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AMT adjustments

  • Itemized deductions

    • medical expenses > 10% instead of 7.5%

    • misc. I.d. not allowed

    • state and local taxes not allowed

    • real and personal property taxes not allowed

  • Timing differences

    • real property after 1986, differences between MACRS and st. line ADS 40 year depreciation amount

    • personal property difference between st. line ADS and MACRS

    • R&E expensed instead of amortized over 10 years

  • Tax credits - only foreign tax credits are allowed

  • AMT credit - prevents double taxation


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Self-employment tax

  • To finance Social security for self-employed individuals

  • self-employment income of >$400 is subject to the tax

  • 12.4% of OASDI (old age, survivors and disability insurance) + 2.9% of hospital insurance

  • To calculate self employment tax,

    • multiply self employment income by 0.9235 (because part of it is allowed as a for AGI deduction) - self employment net earnings

    • Use net earnings to calculate OASDI and HI amount

    • OASDI has a ceiling of $68,400

    • HI has no ceiling


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Payment of taxes

  • Mandatory withholding for employer

  • 10% withholding for nonperiodic payments e.g. lumpsum distributions such as pension

  • 28% rate for compensation in addition to employee’ s regular wages

  • W-4 form

  • May claim additional withholding

  • estimated tax payments for investment income, self-employment income, capital gains, rents and etc.

    • 90% of tax liab of current year

    • 100% of tax liab for prior year, exception if AGI >$150000, different rates


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