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In: Accounting

In 2019, Norm, a carpenter whose tax rate is 30%, received a beach boat from the...

In 2019, Norm, a carpenter whose tax rate is 30%, received a beach boat from the Newport Marina, which has a 35% ordinary tax rate and a 15% long term capital gain tax rate, in exchange for carpentry work to build a new, permanent dock, and Norm spent $12,000 on materials. Norm is going to use the boat to take pleasure cruises with his family. The dock was completed and went into service on November 8, 2019 and Norm was given the boat at that time. The beach boat cost the marina $41,000 and has a five year depreciable life. The marina purchased the boat on February 3, 2018, and put it into service that month for taking clients fishing, and it was the only depreciable asset put into service in 2018. The marina properly claimed depreciation of $4,100 in 2018 and took no Sec. 179 expense or bonus depreciation on it. The fair market value of the boat at the time it was transferred to Norm was $46,000. What are Norm’s tax effects from this transaction for 2019? What are the tax effects for Newport Marina for 2019? Be certain to show all necessary work and analyze all tax consequences related to these transactions for both parties. Compute depreciation.

Solutions

Expert Solution

1. RATE OF TAX :

a. Norm 30%

b. Newport Marina 35 % and LTGT @ 15%

2. Cost of Beach Boat to Marina on 3/2/2018 $41,000

3. Fair value on date of transfer 8/11/2019 $46,000

4. Amount of Materials spend by Norm for the dock $12000

5. Rate of Depreciation full year for the boat on straight line method 20 %

6. Depreciation claimed by Marina in 2018 $4100

7. Salvage value assessed for the boat after 5 Yr $ 20500

8. CALCULATION OF SHORT  TERM CAPITAL GAIN FOR MARINA ON SALE OF BOAT.

(Since the asset is held for only 21 months only )

Written DownValue of Boat on 8/11/2019 $ 36,900

Fair Market Value of Boat on 8/11/2019 $ 46,000

SHORT TERM CAPITAL GAIN $ 9100

TAX ON THIS FOR MARINA @ 35 % $3185

9. TAX EFECT FOR NORMA

Norma received a boat with a FV of $46000 for his buildingthe dock on which he spend materials worth $12000 . So we can assume that his net receipt for buliding the dock is $ 34000. He is taxable only for his profits from the work of building the dock. Since no other details of expenses in this respect are given in the problem we cannot arrive at the profir/loss of Norma. For the acquisition of boat no taxble efect for Norma .

10 CALCULATION OF DEPRECIATION FOR THE YEAR 2019 in the hands of Norm

FMV of the asset acquired on 8/11/2019 46 ,000

Less : Salvage Value of the boat 20,500

DEPRECIATION TO BE PROVIDED IN SLM FOR 4 YEARS = 25,500

DEPRECIATION FOR THE YEAR 2019 25500/4 = $6375

  

ekkarill92 answered 2 years ago
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