In: Accounting
Firm OCS sold business equipment with a $20,500 initial cost basis and $7,765 accumulated tax depreciation. In each of the following cases, compute OCS's recaptured ordinary income and Section 1231 gain or loss on sale. (Leave no cell blank. Enter "0" for cells that do not have an amount.
a.) Amount realized was $10,100
b.) Amount realized was $13,100
c.) Amount realized was $17,600
d.) Amount realized was $23,100
First we need to calculate the adjusted basis of an equipment which is equal to its Initial cost minus depreciation charged
= $ 20500- 7765
= $ 12735
So any gain from realization of equipment over 12735 but upto 20500 is Recaptured oridinary income and any gain above 20500 is Capital gainas per section 1231
Why any realization upto 20500(Cost of an asset) is a recaptured income?
Because we charge depreciation against the ordinary income, so any gain upto the cost of asset will be a part of ordinary income as a recovery of depreciation charged in earlier years
a) Amount realized $ 10100
Since Amount realized is less than its adjusted basis $ 12735, there is a loss of $ 2635 as per scetion 1231.
There is no concept of depreciation recapture in case of loss.
b) Amount realized $ 13100
Since amount realized is greater than $ 12735 but less than 20500, so gain of $ 365(13100-12735) is recaptured ordinary income
c) Amount Realized $ 17600
Since amount realized is greater than $ 12735 but less than 20500, so gain of $ 4865 (17600-12735) is recaptured ordinary income
d) Amount realized $ 23100
Gain upto $ 20500 is a recaptured ordinary income and gain above 20500 is Capital gain as per section 1231
So, Recaptured ordinary income = $20500-12735 = $ 7765
Capital gain = $ 23100- 20500= $ 2600