Question

When an asset is disposed of, there are several questions the tax accountant must answer in determining the tax implications of the disposition. These include the type of asset, the amount realized, the amount of the gain or loss, and how long the asset was held.

What are the different asset classifications? How is the amount realized on a sale or exchange determined? How is the amount of gain or loss determined? How are capital assets classified as short term or long term?

Answer 1

Assets are mainly classified into two groups: Tangible and Intangible. Tangible assets refers to those assets which have a physical existence like pant, machinery, buildings, etc. Intangible assets are those assets which do not have any physical existence but have a monetary value, e.g., goodwill, patents, etc.

The amount realized on a sale of any assets is determined by the cash receipts from such transactions. The amount realized on a exchange of any assets is determined by the value of the assets received in exchange for the asset.

The amount of gain is determined by subtracting the book value of the asset i.e., cost less accumulated depreciation from the sale receipts. The amount of loss is determined by subtracting the sale receipts from the book value of the asset i.e., cost less accumulated.

Those capital assets which are held in the business for long term use are called long term capital assets. These are generally high value assets and it will take a long time to fully depreciate it, example land, building, plant, machinery, etc. Those capital assets which are held in the business for short term use and which can be fully depreciated or disposed in a short period are called short term capital assets, example office equipment, furniture, etc.