What are losses before disposal of an asset?

Question about section 1245 asset purchase.?

• "A company purchased a section 1245 asset for $120000, and after 5 years the same asset had a book value of $80,000. If the company's current taxable income is $400000 before consideration of the gains and losses from the sale of this asset, determine the company's total taxes for the selling price $200,000." The book did: $200,000 - $120,000 = $80,000. As a gain. Why did they subtract the selling price instead of the book value? I am curious. The next part they did : $120,000 - $80,000 = $40,000 as ordinary income. So they did selling price - Book value, or are they doing selling price - gain? The answer ultimately was t = 136,000 + 40,000(.34) + 80,000(.34) = $176,800.

• Answer:

  The first part they are calculating the gain. Proceeds - cost = gain. The second part they are calculating the recapture. When the property was depreciated it was a deduction from ordinary income. When it is sold that deduction is "recaptured" at ordinary income rates. Cost - book value = recapture. Since this is a C-Corp the tax rates are the same for the capital gain and recapture/ordinary amount. If it was an individual you'd have $40,000 taxed at the ordinary rate (10%-35%) and $80,000 taxed at capital gains rate (0%-15%).