Question

A business taxpayer sold all the depreciable assets of the business, calculated the gains and losses, and would like to know the final character of those gains and losses. The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets. The taxpayer had unrecaptured §1231 lookback loss of $12,000.

Asset	Purchase Date	Sale Date	Depreciation	Gain (Loss)
Machine #1	10/10/16	11/11/18	$323,000	$66,000
Machine #2	10/02/16	11/11/18	65,000	(15,000)
Machine #3	09/23/14	11/11/18	183,000	23,000
Machine #4	09/23/14	11/11/18	28,000	64,000

Answer each of the following questions. Be sure to show and label all calculations.

1. Identify the initial classification/type of the gain or loss for each machine.
2. What is the treatment of the gains and losses summarized in the chart below after all possible netting and reclassification has been completed?
3. What is the taxpayer’s adjusted gross income (AGI)?
4. Specify whether ordinary or preferential rates apply to each component of AGI.

Answer 1

Every assessee, whose total income exceeds the Basic Exemption then such assessee shall be require to file an income tax return with the due date as specified in the income tax act 1961.

If such assessee has not filed the return with in the due date then such assessee needs to pay penalty and interest for the delay.

Every assessee whose income tax liability exceeds ₹10,000 then such assessee is require to pay an advance tax . They have to pay atleast 90% of total tax liability by the end of the financial year.

If we had not paid 90% of tax liability then they have to pay interest for that u/s 234.

Generally if any asset has been sold , then such assessee is require to pay an capital gain tax.

If sale value of an asset is more than the purchase value of an asset then the difference shall be considered as Gain otherwise it is loss.

If period of asset is more than 24 months then such asset shall be considered as an Long term capital asset. Then they have to pay Long term capital gain

If period of holding of an asset is less than 24 months then such asset shall be considered as an Short Term Capital asset then such assessee is liable to Short term capital gian tax.

But as per Income tax they had given some exceptions that if period of holding is not more than 12 months for Share , Debentures then such assessee is liable to pay tax as Short term capital gain.

Otherwise it is an Long term Capital gain.

For Long term capital gain assessee is liable to pay tax @ 20%

Normally short capital gain is liable to pay tax @ 15%

Short term capital loss can be set off against any gain either it may short term capital gain or long term capital gain. But long term capital loss should be set off with only Long term capital gain only.

Any unabsorbed losses can be carry forward to next period.

As per Income tax act 1961, sec 50 says , if any depreciable asset sold by an assessee then such assessee is liable to pay tax only short term capital gain or loss irrespective of period of holding of such asset.

(a) As per above comment , all the sale of depreciable asset, irrespective of period of holding of such asset it so be considered as Short term Capital gain / Loss.

Machine 1: It should be considered as an Short term capital gain as $ 66,000

Machine 2: I​​​​​​It should be considered as an Short term Capital Loss of $ 15,000

Machine 3 : It should be considered as an Short term Capital gain of $ 23,000

Machine 4: It should be considered as an Short term capital gain of $ 64,000

(b) Computation of Net short Term Capital Gain / Loss for the following periof:

Total Short term Capital Gain :.   $ 1,53,000

​​​​​​Total short term Capital loss : ($ 15,000)

Short Term Capital Gain : $ 1,38,000

Unrecaptured loss b/ f. : ($ 12,000)

Net Short term capital gain:. $ 1,26,000

(C) Generally, assessee is required to pay tax if total income of an assessee is an more than the basic exemption but if an assessee is having an income of capital gain then such assessee is liable to pay tax irrespective of the income .

Computation of Adjusted Gross income of assessee for the financial year:

Particulars	Amount	Amount
Gross Total Income before capital gain		$ 3,53,000
Add : Short Term Capital Gain ( b)		$ 1,26,000
Adjusted Gross Total Income		$ 4,79,000

​​​​​​(d) For Short Term Capital gain preferential rate has been applicable i.e 15%

Tax on Short Term Capital Gain : ( 126000 * 15%) = $18,900

For other than Short term capital gain , ordinary rates are applicable. Assuming Basic Exemption is an 2,50,000 then remaining $ 2,50,001 to 5,00,000 it is 5%

i.e $ 1,03,000 * 5% = $ 5,150

Total tax Payable. ( 5150+18,900) = $ 24,050

Cess @4 % ( 24050*4%) = $ 962

Total tax payable after cess ( 24,050+ 962) = $ 25,012

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