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Tax: passive losses, depreciation, Sec 1231, ordinary gain

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1). Julie reports the following income and loss:
Salary $ 90,000
Income from activity A 60,000
Loss from activity B ( 35,000)
Loss from activity C ( 55,000)
Activities A, B, and C are all passive activities.
Based on this information, Julie has
a. adjusted gross income of $60,000.
b. salary of $90,000 and net losses of $30,000.
c. salary of $90,000 and passive losses of $30,000 that will be carried over.
d. salary of $90,000, passive income of $60,000, and passive loss carryovers of $90,000.

2). In May 2007 of this year, Cassie acquired a machine for $20,000 to use in her business. The machine is classified as 5 year property. No election is made regarding the property. Cassie's depreciation on the machine this year is
a. $2,000.
b. $4,000.
c. $8,000.
d. $20,000.

3). For a manufacturer, Sec. 1231 property does not include
a. timber, coal, or domestic iron ore.
b. inventory purchased 24 months ago.
c. an office building purchased five years ago.
d. land used in the business that was purchased two years ago.

4). During the current year, a corporation sells for $300,000 equipment that it had purchased and placed in service in 1999. The equipment cost $270,000, and $60,000 of depreciation deductions was allowed. The results of the sale are
a. ordinary income of $90,000.
b. Sec. 1231 gain of $90,000.
c. ordinary income of $60,000 and LTCG of $30,000.
d. ordinary income of $60,000 and Sec. 1231 gain of $30,000.

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Solution Summary

For the four problems presented, the solution discusses the concepts and computes the answers.

Solution Preview

1. Passive losses are only deductible to the extent of passive income. Julie will report 90,000 and carryover the net passive losses of (60,000 - 35,000 - 55,000) = 30,000.

2. MACRS five year ...

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