Laurie Gladin owns land and a building that she has beenusing in her sole proprietorship. She is going to incorporate hersole proprietorship as a C corporation. Laurie must decide whetherto contribute the land and building to the corporation or to leasethem to the corporation. The net income of the sole proprietorshipfor the past five years has averaged $250,000. Advise Laurie on thetax consequences. Summarize your analysis in a memo for the taxfile.
Laurie Gladin owns land and a building that she has beenusing in her sole proprietorship. She is going to incorporate hersole proprietorship as a C corporation. Laurie must decide whetherto contribute the land and building to the corporation or to leasethem to the corporation. The net income of the sole proprietorshipfor the past five years has averaged $250,000. Advise Laurie on thetax consequences. Summarize your analysis in a memo for the taxfile.
Related questions
Several years ago, your client, Brooks Robinson, started an office cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, âThe Human Vacuum Cleaner.â Brooks operated his business as a sole proprietorship and used the cash method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the companyâs common stock. The corporation would also assume the companyâs liabilities (payables and mortgage). (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)
| Balance Sheet | |||||
| Adjusted Basis | FMV | ||||
| Assets | |||||
| Accounts receivable | $ | 0 | $ | 5,000 | |
| Cleaning equipment (net) | 25,000 | 20,000 | |||
| Building | 50,000 | 75,000 | |||
| Land | 25,000 | 50,000 | |||
| Total assets | $ | 100,000 | $ | 150,000 | |
| Liabilities | |||||
| Accounts payable | $ | 0 | $ | 10,000 | |
| Salaries payable | 0 | 5,000 | |||
| Mortgage on land and building | 35,000 | 35,000 | |||
| Total liabilities | $ | 35,000 | $ | 50,000 | |
a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation?
|
b. How much, if any, gain or loss (on a per asset basis) does Brooks recognize?
| Realized gain/loss | |
| Accounts receivable | |
| Equipment | |
| Building | |
| Land | |
| Total | $0 |
c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporationâs stock?
Gain or loss recognized -
d. What tax basis does Brooks have in the corporationâs stock?
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e. What is the corporationâs tax basis in each asset it receives from Brooks?
| Tax Basis | |
| Accounts Receivable | |
| Equipment | |
| Building | |
| Land | |
| Total |
f. How much if any gain or loss will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
| Realized gain/loss | |
| Accounts receivable | |
| Equipment | |
| Building | |
| Land | |
| Total | $0 |
1.Assume that Timberline Corporation has 2016 taxable income of $240,000 before the §179 expense.
| Asset | Purchase Date | Basis |
| Furniture (7-year) | December 1 | $350,000 |
| Computer Equipment (5-year) | February 28 | 90,000 |
| Copier (5-year) | July 15 | 30,000 |
| Machinery (7-year) | May 22 | 480,000 |
| Total | $950,000 |
a. What is the maximum amount of §179 expense Timberline may deduct for 2016? What is Timberlineâs §179 carryforward to 2017, if any?
b. What would Timberlineâs maximum depreciation expense be for 2016 assuming no bonus depreciation?
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2).]Hans runs a sole proprietorship. Hans (a single individual) reported the following net §1231 gains and losses since he began business:
| Year | Net §1231 Gains/(Losses) |
| Year 1 | ($65,000) |
| Year 2 | 15,000 |
| Year 3 | 0 |
| Year 4 | 0 |
| Year 5 | 10,000 |
| Year 6 | 50,000 |
a.
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Kase, an individual, purchased some property in Potomac, Maryland, for $200,000 approximately 10 years ago. Kase is approached by a real estate agent representing a client who would like to exchange a parcel of land in North Carolina for Kaseâs Maryland property. Kase agrees to the exchange. The transaction qualifies as a like-kind exchange and the fair market value of each property is $675,000.
What is Kaseâs realized gain or loss,
Recognized gain or loss,
Basis in the North Carolina property in each of the following scenario?
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4) Russell Corporation sold a parcel of land valued at $500,000. Its basis in the land was $275,000. For the land, Russell received $0.00 in cash in year 0 and a note providing that Russell will receive $250,000 in year 1 and $250,000 in year 2 from the buyer.
a. What is Russellâs realized gain on the transaction?
b. What is Russellâs recognized gain in year 0, year 1, and year 2?
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5). Rayleen owns a condominium near Orlando, Florida. This year, she incurs the following expenses in connection with her condo:
| Insurance | $1,250 |
| Mortgage interest | 7,000 |
| Property taxes | 2,100 |
| Repairs and maintenance | 800 |
| Utilities | 2,300 |
| Depreciation | 9,000 |
During the year, Rayleen rented the condo for 130 days and she received $25,000 of rental receipts. She did not use the condo at all for personal purposes during the year. Rayleen is considered to be an active participant in the property. Rayleen's AGI from all sources other than the rental property is $130,000. Rayleen does not have passive income from any other sources. What is Rayleen's AGI?
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6).]Careen owns a condominium near Newport Beach in California. This year, she incurs the following expenses in connection with her condo:
| Insurance | $1,500 |
| Mortgage interest | 8,500 |
| Property taxes | 4,000 |
| Repairs and maintenance | 950 |
| Utilities | 1,900 |
| Depreciation | 5,500 |
During the year, Careen rented the condo for 90 days, receiving $20,000 of gross income. She personally used the condo for 50 days. Assuming Careen uses the IRS method of allocating expenses to rental use of the property. What is Careen's net rental income for the year?
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7). Darren (single) purchased a home on January 1, 2012 for $400,000. Darren lived in the home as his primary residence until January 1, 2014 when he began using the home as a vacation home. He used the home as a vacation home until January 1 2015 (he used a different home as his primary residence from January 1, 2014 to January 1, 2015). On January 1, 2015, Darren moved back into the home and used it as his primary residence until January 1, 2016 when he sold the home for $500,000. What amount of the $100,000 gain Darren realized on the sale must he recognize for tax purposes in 2016?
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Bonus:
Moab [an unincorporated entity] manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year.
Part (1) Determine the gain/loss realized and recognized in the current year for each of these events. Also determine whether the gain/loss recognized is §1231, capital, or ordinary. Construct a chart to show transactions and gains/loss in good format.
Moab sold a machine that it used to make computerized gadgets for $27,300 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 depreciation.
Moab held stock in ABC Corp. which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year.
sold some of its inventory for $7,000 cash. This inventory had a basis of $5,000.
Moab disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken $15,000 in depreciation.
Moab sold land it held for investment for $28,000. It originally bought the land for $32,000 two years ago.
Moab sold another machine for a note, payable in four annual installments of $12,000. The first payment was received in the current year. It originally bought the machine two years ago for $32,000 and had claimed $9,000 in depreciation expense against the machine.
Moab sold stock it held for eight years for $2,750. It originally purchased the stock for $2,100.
Moab sold another machine for $7,300. It originally purchased this machine six months ago for $9,000 and has claimed $830 in depreciation expense against the asset.
| Item | Sales price | Cost | Depreciation where applicable | Gain/loss | Character of gain/loss |
| A | $27,300 | $19,200 | $8,000 | ||
| B | |||||
| C | |||||
| D | |||||
| E | |||||
| F | |||||
| G | |||||
| H | |||||
Part (2) From the recognized gains/losses determined in part 1, determine the net §1231 gain/loss and the net ordinary gain/loss Moab will recognize on its tax return. Moab also has $2,000 of nonrecaptured §1231 losses from previous years.
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Question 5. Your aunt owns a small officebuilding rented to professionals (such as a dentist, psychologist,urgent care) near a college campus. She had purchased the propertyten years ago at a total cost of $530,000, which was allocatedbased relative values from an appraisal of the property as $480,000for the building and $50,000 for the land.
A reputable real estate management company wants to buy theproperty from her, but the property has been a good source of cashflow for the past ten years. Your aunt is unsure whether she shouldsell now or keep the property for 15 years and sell when sheretires. She hopes to earn a 12% rate of return no matter what shedoes.
You have gathered the following information and plan to useExcel to set up the analysis:
Alternative 1: keep the building. She has keptmeticulous records of the receipts and payments associated with theproperty, and the average annual numbers for the past ten years areas follows:
Rents collected | $140,000 | |
Less building expenditures: | ||
Custodial/maintenance services | $40,000 | |
Utilities | 25,000 | |
Depreciation on building | 16,000 | |
Property taxes and insurance | 18,000 | |
Repairs and maintenance | 9,000 | 108,000 |
Net operating income | $ 32,000 |
She also pays $12,000 a year on the mortgage (to simplify theanalysis, assume this is paid at the end of the year, rather than$1,000 monthly). The mortgage will be paid off in eight years. Shehas just painted the building inside and out at a cost of $25,000,and knows the roof will need replacing in about 5 years for aprojected cost of $20,000 and the HVAC system will be needreplacing in 7 years at a projected cost of $35,000.
She also figures she will incur an average cost increase of 5%over the average shown above for the next 5 years, and then 5%again for years 5-10, and 5% also for years 11-15. She would raisethe rents by 10% for each 5 year increment to help for theserepairs.
She has been depreciating the building over a 25-year life,using straight-line, with a expected salvage value of $80,000 forthe building.
She thinks she might be able to get $120,000 for the building in15 years since real estate prices have been steadily rising, plusthe land should have tripled in price by then.
Alternative 2. Sell the property now. The realestate management company is offering her $175,000 in cash now and$28,500 per year for the next 15 years. Because Management companyis reputable, she has confidence that they will be able to make the15 payments. The management company would take control of theproperty immediately. If your aunt sells off the property, shewould need to pay the balance on the mortgage, which is at$96,000.
Prepare an appropriate analysis to help your aunt make thedecision.
***could you please show computations
If she is not earning a 12% rate of return on keeping thebuilding, what annual rents would she have to charge to do so ineach 5-year increment?
If the real estate management company were not so reputable, howcould she sell them the property and still protect herself?
