ACCT553

Week 4 Homework Solutions

_________________________________________________________

Chapter 14
1. Please describe the concept of double taxation, and discuss which entities are subject to this type of
taxation. (5 points)
A C corporation is subject to tax at the entity level. Shareholders receive distributions of corporate profits
(which are not deductible to the C corporation), and those distributions (dividends) are taxable to the
shareholder's return. This results in double taxation. C corporations are the only entity that is subject to
double taxation (14,385).

2. What type of taxpayers is considered eligible with regard to special ordinary loss treatment of IRC
Section 1244 stock? (5 points)
Eligible shareholders include only individuals and partnerships (14,235).

3. Please describe how the treatment of capital gains (losses) differs for a C corporation as compared to
an individual. (5 points)
Individual taxpayers can offset $3 K of net capital loss against ordinary income, but corporations cannot.
Also, individuals have a preferential long-term capital gains tax rate of 15% - 0%, whereas corporations
are taxed at their ordinary rate (14,315).

4. Please describe the concept of depreciation recapture. (5 points)

Depreciation results in an ordinary deduction when claimed on a tax return. When the asset that was
depreciated is later disposed of in a taxable transaction, the depreciation must be recaptured. This means
that the portion of the gain that is due to depreciation deductions will be taxed as ordinary income rather
than the lower capital gains rate. For example, a piece of equipment used in a trade or business was
purchased for $2,000 and has been depreciated by $550, so its tax basis is $1,450. The equipment is
sold in a taxable transaction for $1,750 for a resulting gain of $300. The gain will be treated as ordinary,
because the $300 is less than the total depreciation claimed on the equipment. With regard to real estate,
the portion that must be recaptured is recaptured at a rate of 25% (14,325).