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Jess sold a piece of equipment she used in her business. The equipment cost Jess $51,500 several...

Question:

Jess sold a piece of equipment she used in her business. The equipment cost Jess $51,500 several years ago and had accumulated depreciation taken in the amount of $20,300. Jess sold the equipment for $35,000.

a) What is her Section 1245 property gain?

b) How much of the gain is subject to recapture at the 25% tax rate?

c) How much of the gain is ordinary income?

Depreciation Expense:

Depreciation expense is the qualified deduction for computing the taxable income. Depreciation expenses associated with a fixed asset will be calculated by total cost regarding this transaction over the asset's lifetime.

Answer and Explanation:

Given information:

  • Purchase price = $51,500
  • Accumulated depreciation = $20,300
  • Salvage value = $35,000

a. Section 1245 Property gain:

Adjusted cost basis for tax = $51,500 - $20,300 = $31,200

Section 1245 gain = $35,000 - $31,200 = $3,800

b.

Since the salvage value is less than than the original purchase price, there is no capital gain in this case. 100% of the section 1245 gain will be taxed as the ordinary income.

c.

As explained above, 100% of section 1245 will be treated as ordinary income.


Learn more about this topic:

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How to Calculate Depreciation Expense: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 14
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