Ali, a Contractor, Builds an Office Building for a Construction

question 87

Essay

Ali, a contractor, builds an office building for a construction partnership in exchange for a capital and profits interest in the partnership worth $500,000. Which of the following statements is correct?
A) Ali recognizes no income and the partnership can deduct nothing in the current year.
B) Ali recognizes $500,000 of ordinary income and the partnership can deduct $500,000 in the current year.
C) Ali recognizes $500,000 ordinary income and the partnership deducts the $500,000 over the building's MACRS recovery period as a depreciation expense.
D) Ali recognizes ordinary income in the current year in an amount equal to the depreciation deduction the partnership claims this year for the $500,000 capitalized amount.

• A) Ali recognizes no income and the partnership can deduct nothing in the current year.
• B) Ali recognizes $500,000 of ordinary income and the partnership can deduct $500,000 in the current year.
• C) Ali recognizes $500,000 ordinary income and the partnership deducts the $500,000 over the building's MACRS recovery period as a depreciation expense.
• D) Ali recognizes ordinary income in the current year in an amount equal to the depreciation deduction the partnership claims this year for the $500,000 capitalized amount.

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Definitions:

Individual Tax Rate

The tax rate applied to an individual's income, which varies depending on income level and filing status, contributing to the progressive taxation system.

Capital Gains

Capital gains are the profit made from the sale of an asset or investment which has increased in value over the holding period.

Current Income

Earnings derived from investments or employment that are received regularly, such as dividends or salaries.

High-Dividend Policy

A corporate strategy focusing on paying out a large portion of its earnings to shareholders in the form of dividends.