Question

alpha sold machinery that it used in its business to beta, a related entity, for $40,200. beta used the machinery in its business. alpha bought the machinery a few years ago for $49,800 and has claimed $30,200 of depreciation expense. what is the amount and character of alpha's gain?

Answer 1

Alpha's gain on the sale of machinery to Beta is $20,600, calculated by subtracting the adjusted cost basis of $19,600 (after claiming $30,200 in depreciation) from the sale price of $40,200. This gain is characterized as ordinary income because it arises from the sale of a business asset.

Step-by-step explanation:

The amount and character of Alpha's gain from the sale of machinery to Beta can be calculated as follows:

• Original purchase price (cost basis) of the machinery: $49,800
• Total depreciation claimed by Alpha: $30,200
• Adjusted cost basis after depreciation: $49,800 - $30,200 = $19,600
• Sale price of machinery: $40,200
• Gain on sale: Sale price - Adjusted cost basis = $40,200 - $19,600 = $20,600

Since the machinery was used in Alpha's business and the gain is the difference between the sale price and the adjusted cost basis after depreciation, this gain would be considered as ordinary income, not a capital gain, as it is from the sale of a business asset.