Question

Shimmer Inc. is a calendar-year-end, accrual-method corporation. This year, it sells the following long-term assets: Asset Sales Price Cost Accumulated Depreciation Building $703,000 $657,000 $54,000 Sparkle Corporation stock 138,000 246,000 n/a Shimmer does not sell any other assets during the year, and its taxable income before these transactions is $820,000. What are Shimmer's taxable income and tax liability for the year? (New Corporate income tax rate has been mentioned as "21% on all taxable income" as per the recent change.)

Answer 1

As per the IRS when a taxpayer sells an asset for a gain after taking depreciation deduction, depreciation recapture comes into picture. Since the taxpayer received a deduction from ordinary income for the depreciation part, any gain the taxpayer receives upto depreciation amount must be included as ordinary income to offset earlier depreciation deduction. Gain over and above that is a capital gain.

Adjusted cost basis = $657000-54000 = $603000

Sale price = $703000

Taxable Gain = $703000-603000 = $100000

Gain taxed as ordinary gain out of this is $54000

Gain taxed as capital gain out of this is $100000-54000 = $46000

Sparkle Corporation Stock Sales Price = $138000

Cost = $246000

Capital loss = $ 246000- $138000= $108000

Net Capital Loss = $108000-$46000

As per the IRS maximum amount that can be claimed as deduction is amount of net capital loss or $3000 whichever is lower. Hence a deduction of $3000 can be claimed from taxable income.

Total Taxable Income = $820000+$54000-$3000 = $871000

Tax Rate is 21%

So Tax Liability = $871000*21% = $182910