Question

On August 1 of year 0, Dirksen purchased a machine for $29,000 to use in its business. On December 4 of year 0, Dirksen sold the machine for $27,750. (Use MACRS Table.) (Loss amounts should be indicated by a minus sign. Do not round percentages used for calculations. Leave no answer blank. Enter zero if applicable.)

a. What is the amount and character of the gain or loss Dirksen will recognize on the sale?

Description	Amount
Total Gain/Loss Recognized
Character of Recognized Gain/Loss:
Ordinary Gain/Loss
§1231 gain/(loss)

b. What is the amount and character of the gain or loss Dirksen will recognize on the sale if the machine was sold on January 15 of year 1 instead?

Description	Amount
Total Gain/Loss Recognized
Character of Recognized Gain/Loss:
Ordinary Gain/Loss
§1231 gain/(loss)

Answer 1

Solution:

a) Calculation of the Amount and Character of the Gain or Loss Dirksen will recognize on the sale:

Description	Amount	Explanation
(1) Amount Realized	$27,750	Given
(2) Original Basis	$29,000	Given
(3) Accumulated Depreciation	$0	*
(4) Adjusted Basis	$29,000	(2) - (3)
(5) Gain/(Loss) Recognized	($1,250)	(1) – (4)
(6) Ordinary income (§1245 depreciation recapture)	$0	Lesser of (3) or (5)
Ordinary loss §1231	($1,250)	(5) – (6)

No depreciation is allowed on an asset placed in service and disposed of during the same taxable year.

b) Calculation of the Amount of the Gain or Loss Dirksen will Recognize on the Sale if the Machine was Sold on January 15 of Year 1 instead:

Description	Amount	Explanation
(1) Amount Realized	$27,750	Given
(2) Original Basis	$29,000	Given
(3) Accumulated Depreciation	$7,695	Calculated Below
(4) Adjusted Basis	$21,305	(2) - (3)
(5) Gain/(Loss) Recognized	$6,445	(1) – (4)
(6) Ordinary income (§1245 depreciation recapture)	$6,445	Lesser of (3) or (5)
Ordinary loss §1231	$0	(5) – (6)

*Assets held less than one year are ordinary rather than section 1231 assets

Year	(1) Original Basis	(2) Rate	(3) Depreciation
1	$29,000	14.29%	$4,144
2	$29,000	12.245%	$3,551
			$7,695