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 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:
- 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
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.
As explained above, 100% of section 1245 will be treated as ordinary income.
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 14