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Chula Vista California online Form 4797: What You Should Know
The main purpose of this Form is to calculate depreciation and amortization deductions, or section 1231 exclusion. Section 1231 property refers to tangible capital assets used or used to generate income while in active use such as: buildings, furniture, machinery, vehicles, real estate, inventory, equipment, machinery or equipment used to produce the income. The exclusion is not to be calculated on items that are used or are only held for trade. For example, if someone sells a used car and keeps the keys, that's not considered property used to generate income, so it may not receive a section 1231 exclusion. Instead, the sale of the car would result in a capital gain of 14,000, which would be subject to the special rule for small business taxpayers that are taxed at 15% instead of the ordinary income tax rate of 35%. Section 1231 Property. Section 1231 property refers to tangible and intangible assets owned by an individual that are not used or directly or indirectly, in the active conduct of a trade or business. In general, these assets may be: • physical property such as furniture and tools; • intellectual property such as patents and copyrights; • intangible assets such as goodwill and intangibles of business combinations such as joint ventures; and • services such as office services, consulting, advertising, management services, and accounting. The IRS has not defined any specific exclusion for any class of intangible or tangible property, though it has created a list of common factors to consider (see ). The exclusions are designed to provide a tax advantage to businesses whose losses can be offset by the special tax rate on “passive investment income” (sales of interest, dividends, and other passive investments) paid to shareholders. Section 1231 exclusion for losses on investment property is meant to reduce the tax liability on profits by a minimum of 30%, assuming that there is no loss on the property itself. For example, a 1,000 loss on a stock investment is not deductible because the entire loss reduces the net income from the trade. If the stock were liquidated because the value drops 250, the net profit would be 500. However, if the stock had continued to trade and accumulated losses up to 1,500, no deductible losses would occur. So the capital loss on the investment is 1,500 instead of 1,000.
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