Joanne is in the 28% tax bracket and owns depreciable business equipment that sh

Question

Joanne is in the 28% tax bracket and owns depreciable business equipment that she purchased several years ago for $135,000. She has taken $100,000 of depreciation on the equipment, and it is worth $55,000. Joanne’s niece, Susan, is starting a new business and is short of cash. Susan has asked Joanne to gift the equipment to her so that Susan can use it in her business. Joanne no longer needs the equipment. Identify the alternatives available to Joanne if she wants to help Susan and the tax effects of those alternatives. (Assume that all alternatives involve the business equipment in one way or another, and ignore the gift tax.)

Explanation / Answer

If Joanne sells off the asset then in that case she'll be liable for Section 1231 gain as she was using a depreciable business equipment. She will have to pay capital gains which can be long term . However if Susan takes up the asset i.e purchase then she can also claim depreciation on the same.

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