Question

In: Accounting

Background Patrick, a long-time client of yours, recently sold a few assets from his business. He...

Background

Patrick, a long-time client of yours, recently sold a few assets from his business. He brings the following information to you hoping you can help him make heads or tails of it:

He sold an old pickup truck for $9,888 cash.

He originally purchased the truck 10 years ago for $30,900. Since then, he has performed normal maintenance on it. At one point, he had to replace the truck's transmission for an additional $3,589. (Because you knew about this, you have properly recorded depreciation on the truck for a total of $32,000 before the sale.)

He sold an office building that he owned and used in his business. He purchased it 15 years ago for $800,000. Since then, he has added major improvements to the building, totaling $15,789.

The depreciation taken on the building and the improvements through the date of the sale is $400,000.

He sold the building for $978,000.

Task Citing applicable tax law and regulations, prepare a tax memo explaining how to determine gain or loss on the two sales and how it will be taxed or deducted.

Solutions

Expert Solution

(1) Sale price of the truck=$9888.

Purchase Price of the truck=$30900

Replacement cost of Truck's transmission=$3589.

Peplacement cost will be capitalized in the purchase price .

So therefore the total costs would be $30900+$3589=$34489.

Depriciation recorded before sale =$32000.

So , book value till the date of sale would be=$34489-$32000

=$2489.

Cash sale price =$9888.

Loss on sale =$9888-$2489=$7399.

No tax will be deducted on this sale as there is loss. Taxability occurs only on income.

(2)Sale price of the building=$978000

Improvement costs will be addeed to the purchase price=$15789.

Purchase price of the building=$800000.

Depriciation on building=$400000.

Total costs of the building=$800000+$15789

$815789.

Book value till date of sale=$800000+$15789-$400000

=$415789.

Profit on sale =$978000-$415789=$562211.

Taxability will occur on $562211 as there is profit on sale.

An assesse has always has to pay tax if he earns income.

As building is a capital asset so therefore he will pay capital gain tax.

ekkarill92 answered 9 months ago
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