Example 6

A CORPORATION sold the following business assets this year.....

Sales Accumulated Holding

Price Cost Depreciation Period
Inventory 750,000 300,000 - > 1 Yr
Delivery Truck 45,000 70,000 40,000 > 1 Yr
Delivery Truck 42,500 70,000 40,000 < 1 Yr
Stock (Working Capital) 25,000 20,000 - > 1 Yr
Furniture 2,500 10,000 6,000 > 1 Yr
Machinery 225,000 300,000 100,000 > 1 Yr
Warehouse 800,000 500,000 400,000 > 1 Yr
Land (Warehouse) 200,000 75,000 - > 1 Yr

Adjusted Basis Recapture to OI 1231

Amount Initial Accumulated Recognized Character LO: AD or Gain Balance
Realized Basis Depreciation G or L Ordinary Capital 1231 1245 291 (20%) After Recap
Inventory 750,000 300,000 - 450,000 450,000
Delivery Truck 45,000 70,000 40,000 15,000 15,000 15,000
Delivery Truck 42,500 70,000 40,000 12,500 12,500
Stock (Working Capital) 25,000 20,000 - 5,000 5,000
Furniture 2,500 10,000 6,000 (1,500) (1,500) (1,500) CL
Machinery 225,000 300,000 100,000 25,000 25,000 25,000
Warehouse 800,000 500,000 400,000 700,000 700,000 80,000 620,000 CG
Land (Warehouse) 200,000 75,000 - 125,000 125,000 125,000 CG
1,331,000 462,500 5,000 40,000 80,000 743,500 Net CG
120,000 743,500 1231 Gs > 1231 Ls
Final Income 582,500 748,500 1,331,000

Taxed @ OI Rates
Example 7
A CORPORATION sold the following business assets this year.....

Sales Accumulated Holding

Price Cost Depreciation Period
Inventory 750,000 300,000 - > 1 Yr
Delivery Truck 45,000 70,000 40,000 > 1 Yr
Delivery Truck 42,500 70,000 40,000 < 1 Yr
Stock (Working Capital) 25,000 20,000 - > 1 Yr
Furniture 2,500 10,000 6,000 > 1 Yr
Machinery 275,000 250,000 25,000 > 1 Yr
Warehouse 200,000 500,000 100,000 > 1 Yr
Land (Warehouse) 50,000 75,000 - > 1 Yr

Adjusted Basis Recapture to OI 1231

Amount Initial Accumulated Recognized Character LO: AD or Gain Balance
Realized Basis Depreciation G or L Ordinary Capital 1231 1245 291 (20%) After Recap
Inventory 750,000 300,000 - 450,000 450,000
Delivery Truck 45,000 70,000 40,000 15,000 15,000 15,000
Delivery Truck 42,500 70,000 40,000 12,500 12,500
Stock (Working Capital) 25,000 20,000 - 5,000 5,000
Furniture 2,500 10,000 6,000 (1,500) (1,500) (1,500) OL
Machinery 275,000 250,000 25,000 50,000 50,000 25,000 25,000 OI
Warehouse 200,000 500,000 100,000 (200,000) (200,000) (200,000) OL
Land (Warehouse) 50,000 75,000 - (25,000) (25,000) (25,000) OL
306,000 462,500 5,000 40,000 - (201,500) Net OL
40,000 1231 Ls > 1231 Gs
(201,500)
Final Income 301,000 5,000 306,000

Taxed @ OI Rates
Example 8
A SOLE PROPRIETOR sold the following business assets this year.....

Sales Accumulated Holding

Price Cost Depreciation Period
Inventory 750,000 300,000 - > 1 Yr
Delivery Truck 45,000 70,000 40,000 > 1 Yr
Delivery Truck 42,500 70,000 40,000 < 1 Yr
Stock (Working Capital) 25,000 20,000 - > 1 Yr
Furniture 2,500 10,000 6,000 > 1 Yr
Machinery 225,000 300,000 100,000 > 1 Yr
Warehouse 800,000 500,000 400,000 > 1 Yr
Land (Warehouse) 200,000 75,000 - > 1 Yr

Adjusted Basis Recapture to OI 1231

Amount Initial Accumulated Recognized Character LO: AD or Gain Balance
Realized Basis Depreciation G or L Ordinary Capital 1231 1245 291 (20%) After Recap
Inventory 750,000 300,000 - 450,000 450,000
Delivery Truck 45,000 70,000 40,000 15,000 15,000 15,000
Delivery Truck 42,500 70,000 40,000 12,500 12,500
Stock (Working Capital) 25,000 20,000 - 5,000 5,000
Furniture 2,500 10,000 6,000 (1,500) (1,500) (1,500) CL
Machinery 225,000 300,000 100,000 25,000 25,000 25,000
Warehouse 800,000 500,000 400,000 700,000 700,000 700,000 CG *Unrecap 1250
Land (Warehouse) 200,000 75,000 - 125,000 125,000 125,000 CG
1,331,000 462,500 5,000 40,000 - 823,500 Net CG
40,000 423,500 1231 Gs > 1231 Ls
400,000
Final Income 502,500 828,500 1,331,000

Taxed @ $428,500 Taxed @ 0/15/20%

OI Rates $400,000 Taxed @ Max of 25%
Example 9
A SOLE PROPRIETOR sold the following business assets this year.....

Sales Accumulated Holding

Price Cost Depreciation Period
Inventory 750,000 300,000 - > 1 Yr
Delivery Truck 45,000 70,000 40,000 > 1 Yr
Delivery Truck 42,500 70,000 40,000 < 1 Yr
Stock (Working Capital) 25,000 20,000 - > 1 Yr
Furniture 2,500 10,000 6,000 > 1 Yr
Machinery 225,000 300,000 100,000 > 1 Yr
Warehouse 200,000 300,000 50,000 > 1 Yr
Land (Warehouse) 200,000 75,000 - > 1 Yr

Adjusted Basis Recapture to OI 1231

Amount Initial Accumulated Recognized Character LO: AD or Gain Balance
Realized Basis Depreciation G or L Ordinary Capital 1231 1245 291 (20%) After Recap
Inventory 750,000 300,000 - 450,000 450,000
Delivery Truck 45,000 70,000 40,000 15,000 15,000 15,000
Delivery Truck 42,500 70,000 40,000 12,500 12,500
Stock (Working Capital) 25,000 20,000 - 5,000 5,000
Furniture 2,500 10,000 6,000 (1,500) (1,500) (1,500) CL
Machinery 225,000 300,000 100,000 25,000 25,000 25,000
Warehouse 200,000 300,000 50,000 (50,000) (50,000) (50,000) CL
Land (Warehouse) 200,000 75,000 - 125,000 125,000 125,000 CG
581,000 462,500 5,000 40,000 - 73,500 Net CG
40,000 73,500 1231 Gs > 1231 Ls
Final Income 502,500 78,500 581,000

Taxed @ $78,500 Taxed @ 0/15/20%

OI Rates
Example 10
A SOLE PROPRIETOR sold the following business assets this year.....

Sales Accumulated Holding

Price Cost Depreciation Period
Inventory 750,000 300,000 - > 1 Yr
Delivery Truck 45,000 70,000 40,000 > 1 Yr
Delivery Truck 42,500 70,000 40,000 < 1 Yr
Stock (Working Capital) 25,000 20,000 - > 1 Yr
Furniture 2,500 10,000 6,000 > 1 Yr
Machinery 275,000 250,000 25,000 > 1 Yr
Warehouse 200,000 500,000 100,000 > 1 Yr
Land (Warehouse) 50,000 75,000 - > 1 Yr

Adjusted Basis Recapture to OI 1231

Amount Initial Accumulated Real/Recog Character LO: AD or Gain Balance
Realized Basis Depreciation G or L Ordinary Capital 1231 1245 291 (20%) After Recap
Inventory 750,000 300,000 - 450,000 450,000
Delivery Truck 45,000 70,000 40,000 15,000 15,000 15,000
Delivery Truck 42,500 70,000 40,000 12,500 12,500
Stock (Working Capital) 25,000 20,000 - 5,000 5,000
Furniture 2,500 10,000 6,000 (1,500) (1,500) (1,500) OL
Machinery 275,000 250,000 25,000 50,000 50,000 25,000 25,000 OI
Warehouse 200,000 500,000 100,000 (200,000) (200,000) (200,000) OL
Land (Warehouse) 50,000 75,000 - (25,000) (25,000) (25,000) OL
306,000 462,500 5,000 40,000 - (201,500) Net OL
40,000 1231 Ls > 1231 Gs
(201,500)
Final Income 301,000 5,000 306,000

Taxed @ $5,000 Taxed @ 0/15/20%

OI Rates
Example 11
Following the facts in Example 9, a Sole Proprietor netted his 1231 Gains and Losses and calculated a net 1231 G of $73,500 in the Current Year (Year 10)

The business had the following net 1231 Gains and Losses in its previous years.

Check Yr 5
first, then Yr 4 Net 1231 Treated As Year 5 Year 7 Year 10
and so on.. Gain or Loss Ordinary Capital Recaptured Unrecaptured Recaptured Unrecaptured Recaptured Unrecaptured
Year 10 73,500 66,000 7,500
Year 9 (33,000) (33,000) 33,000 -
Year 8 (18,000) (18,000) 18,000 -
Year 7 23,000 23,000
Year 6 (38,000) (38,000) 23,000 (15,000) 15,000 -
Year 5 53,000 26,000 27,000
Year 4 (26,000) (26,000) 26,000 -
Year 3 8,000 8,000
Year 2 3,000 3,000
Year 1 5,000 5,000
In Yr 5, although a 1231 G of In Yr 7, although a 1231 G of In Yr 10, although a 1231 G of
$53k was netted, $26k of 1231 L $23k was netted, $23k of 1231 L $73.5k was netted, $15k of 1231 L
was recaptured from Yr 4. This was recaptured from Yr 6. This is 1st recaptured from Yr 6. Then
resulted in the recharacterization resulted in the recharacterization $18k is recaptured from Yr 8.
of $26k of the current year 1231 of $23k of the current year 1231 Finally, $33k is recaptured from
G into OI. The balance of $27k G into OI, which was all of the Yr 9. So, of the current year
remained Capital, because there current year G. Not all of the Y6 1231 G of $73.5k, $66k will be
were no other prior year 1231 L 1231 Ls were recaptured. $15k OI. The balance of $7.5k will be
to recapture. remains available for recapture treated as Capital.
in future years.