Question

5. How are employee discounts treated for employee purchases of inventory? 6. How are employee discounts treated for employee purchases of services? 7. Section 1245 depreciation recapture generally recaptures gain as ordinary income to the extent of accumulated depreciation or the recognized gain, whichever is less. Define the type of property that is subject to Section 1245 depreciation recapture? 8. What are the carryover provisions for Section 1245 depreciation recapture?

Answer 1

5. How are employee discounts treated for employee purchases of inventory?

Answer; Employee discounts for employee purchases of inventory will be considered as ‘Qualified Employee Discount’. Under Sec. 132(c), the Employee can eligible to deduct a qualified employee discount which “does not exceed the gross profit percentage of the price which offering to customers.”

Explanation; Employee Discount is the Fringe Benefit which are price reduction received by the Employee for the purchase of property or services of the Employer. Under Sec. 132(a)(2), Employee is eligible to Deduct a ‘Qualified Employee Discount’ on purchase of Qualified property , Merchandise or services from his Taxable Income.

‘Qualified Property, Merchandise or services’ means the property and services offered for sale to the customers in ordinary business of employer in which the employee is working. ‘Qualified Property, Merchandise or services’ does not include the property held for Investment and the goods or services which is selling through the Employee store.

In this case, Employee purchases of inventory will be considered as ‘Qualified Merchandise’, since the Inventory of the Employer will be the Finished goods which is for selling purposes and not held for Investment purposes.

………………………………………………………………………………………6. How are employee discounts treated for employee purchases of services?

Answer; Employee discounts for employee purchases of services will be considered as ‘Qualified Employee Discount’. Under Sec. 132(c), the Employee can eligible to deduct a qualified employee discount which “does not exceed 20% of the price which is offering to customers.”

Explanation; Employee Discount is the Fringe Benefit which are price reduction received by the Employee for the purchase of property or services of the Employer. Under Sec. 132(a)(2), Employee is eligible to Deduct a ‘Qualified Employee Discount’ on purchase of Qualified property, Merchandise or services from his Taxable Income.

‘Qualified Property, Merchandise or services’ means the property and services offered for sale to the customers in ordinary business of employer in which the employee is working. ‘Qualified Property, Merchandise or services’ does not include the property held for Investment and the goods or services which is selling through the Employee store.

In this case, Employee purchases of services will be considered as ‘Qualified services’, since the services are not held for Investment purposes.

………………………………………………………………………………………7. Section 1245 depreciation recapture generally recaptures gain as ordinary income to the extent of accumulated depreciation or the recognized gain, whichever is less. Define the type of property that is subject to Section 1245 depreciation recapture?

Answer; Under Sec 1245, defines the property that is subject to Section 1245 depreciation recapture is all property which is depreciable or amortisable or which has an allowance for depreciation or amortisation. So when you sell these property, the gain on sale should treated as Ordinary Income.

The following are the type of property which are includes in Sec 1245;

i.Tangible or intangible personal property

ii. Other tangible properties except buildings and their structural components. These tangible properties should be used as “an integral part or research facility or oil or gas storage tanks and grain storage bins” of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services.

iii.Real properties which not include in above categories

iv. Agricultural purpose or horticultural structures.

v. Storage facility except buildings and their structural components which used in distribution of petroleum or any primary product of petroleum.

vi. Any railroad grading or tunnel bore.

8. What are the carryover provisions for Section 1245 depreciation recapture?

Answer;The depreciation recapture is recognised in the period of sale of properties. Depreciation recapture potential will not carryover from the taxpayers and it can be carryover to the replacement of properties.