Question

On October 1, 2017, John Oak a sole-proprietor, purchased a machine for 20000 to use in his business this was the only purchase he made fir the year. on December 4,2019, he sold the machin for $21000. john Oak us a calendar year taxpayer. he dud nit elect section 179 expense or bonus depreciation. compute the adjusted basis, the amount of gain or loss realize, and, determine the character of the gain or loss on the sale

Answer 1

Machine purchased in fourth quarter and is only asset placed in service during year. Mid quarter convention applicable.

Total depreciation taken is:

Year	Basis	× rate	Depreciation
2017	$      20,000	3.57%	$       714.00
2018	$      20,000	27.55%	$    5,510.00
2019	$      20,000	17.22%	$    3,444.00
		[19.68% × 10.5/12]
Total			$    9,668.00
Cost	$      20,000
Less: depreciation	$       (9,668)
Adjusted basis	$      10,332
Selling price	$      21,000
Less: adjusted basis	$     (10,332)
Realized gain	$      10,668
Less: gain treated as ordinary income	$       (9,668)
Long-term capital gain	$         1,000

Depreciation is calculated under mid-quarter convnention fourth quarter.

Gain is ordinary income to the extent of depreciation taken.

Thus, ordinary income is $9,668 and long-term capital gain is $1,000 on sale.

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