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REG2, REG120054, REG218323, REG210370, REG218056, REG218204, REG218219,…

- - - - All the disposed assets of Lobster, Inc. qualify as Section 1231 property. Sec. 1231 assets comprise of personal and real property that is used in trade or business and held for over 12 months. They include depreciable property and land, involuntary conversions (due casualties, theft and condemnation), sale or exchange of livestock, cattle and horses, unharvested crops, cutting and disposal of timber and disposal of coal or iron ore.
      - Upon sale of Section 1231 assets after being held for over a year, any net gain is long term capital gain and net loss is ordinary loss (best of both worlds!). They are also subject to the provisions of Sec. 1245 and Sec. 1250 which require recapture of depreciation deducted or deductible as ordinary income.
      - Since all the dispositions listed resulted in a loss, Lobster, Inc. would recognize an ordinary Sec. 1231 loss of $290,000 ($25,000 + $250,000 + $15,000).
      - Note: There is no depreciation recapture for the sale of building, since the transaction resulted in a loss.
- - - - Depreciation using MACRS (Modified Accelerated Cost Recovery System) allows depreciation over a stated recovery period that is generally shorter than the asset’s estimated useful life and salvage value is ignored. There are two depreciation systems-General Depreciation System (GDS) and Alternate Depreciation System (ADS).
      - GDS is most commonly used MACRS and it allows for 150%-200% declining personal property and straight line real property. Depreciation conventions are used to determine the amount for the first and last years' depreciation. Personal property (which use double declining balance method) follow half-year or mid quarter convention and real properties (which use straight line method) follow mid-month convention. Thus, statement I is not true.
      - Land is not depreciable and real properties are depreciated on a straight line basis. Thus, statement II is also untrue.
- - - - The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
      - The taxpayer didn’t acquire the property from a related party.
      - The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
      - The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
      - The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
      - Also, the cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).
- - - - A taxpayer can claim bonus depreciation, an additional first year depreciation after any Section 179 expense deduction and before regular depreciation under the modified accelerated cost recovery system (MACRS).
      - For tax year 2022, the maximum Sec 179 expense deduction is $1.08 mm, reduced $ for $ by the amount by which Sec 179 property placed in service during the tax year exceeds $2.70 mm.
      - The qualifying property for Sec 179 and bonus depreciation includes both new or used assets, provided the asset is a new purchase for the business.
      - Therefore, the amount of bonus depreciation that can be claimed after Sec 179 deduction would be:
      - Sec 179 deduction:
      - Total amount of asset purchased and put to use: $4,250,000
      - Sec 179 deduction (max amount): $1,080,000
      - Reduction in Sec 179 deduction due to phase out limitation for 2022: $1,550,000 ($4,250,000 - $2,700,000)
      - Sec 179 deduction (allowed): $0
      - Bonus Depreciation
      - Depreciable base for bonus depreciation after Sec 179 deduction: $4,250,000
      - Bonus %age for 2022 - 100
      - Bonus Depreciation: $4,250,000
- - - - The costs incurred for property placed in trade or business can be recovered through Section 179 expense, bonus depreciation and MACRS depreciation in the same order. First the Section 179 expense is claimed, then the bonus depreciation is claimed and then the depreciation as per cost recovery method is claimed on the remaining basis.
      - Section 179 expense is an optional election that allows “expensing” of the cost of purchase of qualified business-use property up to $1,080,000 [for 2022] subject to a phase out. Deduction not permitted if net loss exists or deduction creates a net loss.
      - As the self-employed taxpayer has a net operating loss, he cannot claim section 179 expense but can claim both bonus and MACRS depreciation as all three types of machinery are qualifying property.
      - Thus, he can claim II and III in that order.
- - - - Year Capital Gain/(Loss) Loss Allowed Carry Forward
      - 1 $(5,000) $(3,000) $(2,000)
      - 2 $(2,000) Cfwd. + $1,000 Y2 Gain = $(1,000) $(1,000) -
      - 3 $4,000 - -
- - - - As per general depreciation system (GDS) of MACRS depreciation, computers are depreciated as a double declining 5 years 200% class as a half-year convention and interiors work in office space is depreciated as real estate as a 15 year straight line class as mid-month convention.
      - Depreciation on computers = $400,000 x (1 / 5) x (1 / 2) x 200% = $80,000.
      - Depreciation on interiors work = $225,000 x (1 / 15) x (3.5 / 12) = $4,375.
      - Total depreciation = $80,000 + $4,375 = $84,375.
- - - - Particulars Cost of purchase MACRS Adjusted basis as at december 31, 2018
      - Machinery A $600,000 $$600,000 x (2 / 5) x (1 / 2) =$120,000 $480,000
      - Office furniture 800,000 $800,000 x (2/7) x (1 / 2) = $114,286 685,714
      - Computers 400,000 $400,000 x (2/5) x (1/ 2) = $80,000 320,000
        
        Why is half yearly convention used for all the assets?
        
        because half year is the general one which is used for all the assets unless more than 40% assets are placed in business in last quarter in which case you use half quarter.
      - Total $1,800,000 $314,286 $1,485,714
- - - - Realized gain = FMV of new property + boot received - basis of property given up - boot given.
      - Realized gain = ($350,000 + $120,000 - $250,000 - $70,000) = $150,000.
      - Boot = $120,000 relief of liability - $70,000 assumption of liability = $50,000.
      - Recognized gain = Smaller of (1) realized gain $150,000 or (2) actual boot received $50,000 = $50,000.