1- Indicate the character of each of the following assets (i.e. capital, ordinar
ID: 2545155 • Letter: 1
Question
1- Indicate the character of each of the following assets (i.e. capital, ordinary , or 1231):
a. Automobile held by a car dealership to sell to customers
b. Automobile held by an individual for personal use
c. Automobile held by a corporation for business use
2- Gold Corporation has determined its taxable income as $222,000 before considering the results of its 1231 and capital transactions. Gold has a net 1231 gain of $16,000, a STCL of $9,000, a LTCL of $48,000, and a STCG of $29,000. Gold has no non-recaptured net Section 1231 losses from prior years and does not have any capital loss carry-forwards.
a. What (if any) are the amount and nature of its capital loss carryover?
b. What is Gold Corporation’s taxable income?
Explanation / Answer
1A. Ordinary because Held for Sell to customer
1B. Capital because use for the Personal Use
1C. 1231 because use by Corporation for Business use
2a. Capital Loss Carry Over = LTCL - Amount Remaing in STCG after Setoff of STCL
= $ 48,000 - ($ 29,000 - $ 9,000)
= $ 48,000 - $ 20,000
= $ 20,000 will be carry over as LTCL
2B. Gold Corporation Taxable income = $ 222,000 + $ 16,000 (1231 Gain)
= $ 238,000
The 1231 Gain will be Liable to tax at capital gain rate but not allowed to setoff against capital loss but it will treated as the ordinary business income but tax at lower rate of capital gain.
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