Taxpayer agrees to sell machinery used in its business for $90,000. The original
ID: 2585890 • Letter: T
Question
Taxpayer agrees to sell machinery used in its business for $90,000. The original basis was $80,000 and there is accumulated depreciation of $30,000. What is the amount and character of the gain in the following scenarios?
1. Full payment is received in 2017.
2. Installment sale - $45,000 paid in 2017 and $45,000 paid in 2018.
3. Installment sale - $0 paid in 2017 and $90,000 paid in 2018.
Does it make a difference if taxpayer reports income on the cash basis or on the accrual basis?
Explanation / Answer
Original cost $80000
Less: Accumulated
Depreciation $30000
----------
Written Down Value
at the beginning of
2017 $50000
======
Sale consideration $90000
Scenario 1: When the entire amount is received in 2017, it will be considered as short-term capital gains arising from the sale of depreciable asset (assuming there are no other assets in the same category as this asset) and the value of the capital gains will be ($90000 - $50000) = $40000 to be taxed as such in the assessment for 2017.
Scenario 2: Capital gains arises when transfer takes place. This means transactions are substantially completed so as to transfer ownership of the asset. This could include possession of the asset. Therefore, when $45000 is received in 2017, it should be ascertained whether transactions have concluded and transfer has been effected, say by way of transfer of possession. If yes, then the capital gains will be the same $40000, even though only $45000 has been received. If, on the other hand, no transfer has taken place, then there will be no capital gains for 2017, and $45000 received in the year will be treated as advance received for sale of asset with no tax implications. When transfer occurs after $45000 is received in 2018, capital gains of $40000 will be taxed in that year.
Scenario 3: Here also the same reasoning as above should be applied. If transfer takes place but no amount has been received, then $40000 will be the taxable capital gains for 2017. If transfer does not take place in 2017, but only on receiving $90000 in 2018, capital gains will be taxed in 2018.
Method of accounting followed by the taxpayer is not relevant for capital gains. The taxable event is transfer of the asset and capital gains will be taxed according to the timing of the transfer and not of accounting of receipt.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.