384 INCOME TAXES
CAPITAL GAINS AND LOSSESFOR NON DEPRECIATEDASSETS
When a nondepreciatedcapital asset is sold or exchanged,there must be entries in the firm's
accounting records to reflect the change. If the selling price of the capital asset exceeds the
original cost basis, the excess is called a capital gain. If the selling price is less than
the original cost basis, the difference is a capital loss. Examples of nondepreciated assets
include stocks, land, art, and collectibles.
Capital[~~:] =Selling price - Original cost basis
There have been quite elaborate rules in the past for the tax treatment of capital gains and
losses. For example, nondepreciated capital assets held for more than 6 months produced.
long-termgains or losses. Assets held less than 6 months producedshort-iermgains and
losses.
Current tax law sets the net capital gains tax at 20% for most assets held by individuals
more than one year. This is in 'contrast to recaptured depreciation, which is taxed at the
same rate as other (ordinary) income. The tax treatment of capital gains and losses for
nondepreciated assets is shown in Table 12-5.
TABLE 12-5 Tax Treatment of Capital Gains and Losses
For Individuals
Capital gain
Capital loss
For assets held for less than I year, taxed as ordinary income.
For assets held for more than 1 year, taxed at 20% tax rate. *
Subtract capital losses from any capital gains; balance may be deducted from
ordinary income, but not more than $3000 per year. Excess capital losses may
be carried into future taxable years indefinitely.
For Corporations
Capital gain
Capital loss
Taxed as ordinary income.
Corporations may deduct capital losses only to the extent of capital gains.
Any capital loss in the current year that exceeds capital gains can be carried
back 2 years, and, if not completely absorbed, is then carried forward for
up to 20 years.
*Depending on tax bracket, type of asset, and duration of ownership the capital gain tax rate can range
from 8 to 28%. In addition, a special 0% capital gain tax rate applies to homeowners who treat their
home as a primary residence for at least 2 years before selling. In such cases, single taxpayers are
allowed $250,000 in tax-free gain ($500,000 for married couples).
Investment Tax Credit
When the economy slows down and unemployment rises, the U.S. government frequently
alters its tax laws to promote greater industrial activity. One technique used to stimulate
capital investments has been the investment tax credit. Businesses were able to deduct
from 4 to 8% of their new business equipment purchases as atax credit.This meant that the
finn's net cost of the equipment was reduced by the amount of the investment tax credit.
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