Background Patrick, a long-time client of yours, recently sold a few assets from
ID: 2558161 • Letter: B
Question
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.
Explanation / Answer
(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.
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