Eric Purchased a Building in 2007 That He Uses in His

question 942

Multiple Choice

Eric purchased a building in 2007 that he uses in his business. Eric uses the straight- line method for the building. Eric's original cost for the building is $420,000 and cost- recovery deductions are $120,000. Eric is in the top tax bracket and has never sold any other business assets. If the building is sold for $560,000, the tax results are

• A) $120,000 Sec. 1245 ordinary income, $140,000 Sec. 1231 gain taxable at 20%.
• B) $260,000 unrecaptured Sec. 1250 gain, all taxable at 25%.
• C) $260,000 Sec. 1231 gain, of which $120,000 is unrecaptured Sec. 1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.
• D) $260,000 Sec. 1231 gain, all taxable at 20%.

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Definitions:

Significant Influence

The ability of an investor to affect decisions of the investee in which it holds a significant but not controlling interest, typically through ownership of 20% to 50% of voting shares.

Investee

The entity in which an investment is made, usually implying that the investor has significant influence but not full control over it.

Equity Method

An accounting technique used to record investments in associate companies where the investor has significant influence but not full control.

Cost Method

An accounting method that values inventory and cost of goods sold based on the purchase cost of the materials.