Briefly identify the federal tax issue(s) and the related federal tax consequence(s) for each of the following independent factual situations. Assume cash-basis taxpayers in all situations. Assume you are the tax preparer for the taxpayers involved and they have asked you if the transactions have any ramifications for tax purposes. What would you tell them? What are the tax issues? What specific dollar impact will the transaction have on the computation of federal taxable income? What will be the character of the transaction (for example, ordinary income/deduction, capital gain/loss, §1231 gain/loss, §1245 gain, §1250 gain, etc.)? Will the transaction be taxable (deductible) for self-employment tax purposes? Are there other issues that the client should be made aware of? You are not required to prepare a letter to client or memo to file, rather just a reasonable response as reflected in the example provided. 

Example:

Modern Corporation (assume it is a C corporation formed and doing business in Minnesota, the type of corporation subject to the 21% federal income tax rate) sold a used pick-up truck to the company president (also the sole shareholder who is being paid a reasonable salary) for only $1,000 (a very good deal). The president planned to keep the truck at the family’s lake cabin and use it mostly for hunting and fishing trips with his children. The fully-depreciated truck was originally purchased by the corporation for $30,000, and had an estimated value of $10,000 at the time it was sold to the company president. You are the tax preparer for both the corporation and the company president/sole shareholder. Are there any issues that should concern either the corporation or the president/shareholder?

The issue to be resolved is whether this bargain purchase is taxable to the president/sole shareholder. The corporation should probably be reporting a $10,000 (not $1,000) as ordinary income due to §1245 recapture on the sale (which would be taxed at 21%), and a $9,000 non-deductible dividend paid. Since the president/sole shareholder is already being paid a reasonable salary, he should be reporting $9,000 dividend income for the bargain element, which will be taxed at the lower preferential tax for qualified dividends.

1. 
   
2. Harry (who is in a 35% regular tax bracket) purchased a shop building on March 1, 2016 for $200,000 (of which $20,000 was attributable to the land under the building and $180,000 was attributable to the building). He used the land and building 100% in his sole proprietorship construction business until selling them on May 31, 2020 for $240,000 (of which $25,000 was attributable to the land and $225,000 was attributable to the building). Compute the depreciation deductions separately for 2016, 2017, 2018, 2019, and 2020. Also compute the 2020 gains (losses) separately on the land and building. Make sure you indicate the amount of each gain (loss) if any, the character of each gain or loss, and the tax rate that will be applied to each gain (loss).