goosey wrote:I have a question: when we went over deductible business expenses one of the main questions was whether it was a capital expenditure [which is not deductible but must be capitalized and recovered either through depreciation/ammortization or else upon sale] or else if it was a deductible business expense. Now we are going over capital gains and losses and the code says that everything is a capital asset except for [insert list here that I dont know off the top of my head]---one of the things listed is machinery used in the course of business. So how is it possible for something to go from being a capital expenditure in 162 or 212 to now being "ordinary" rather than capital gain/loss???? I am so confused!!! I thought machines were capital expenditures....then why no capital loss??? Is the word "capital" in the code simply a chameleon that changes definitions depending on the section???
In my outline from a couple of years ago I have:
3) Capital Gains and Losses
c) Business Machinery & equipment, Goodwill, and Real Estate. .
i. Although business machinery & equipment, goodwill, and real estate are not "capital assets" (IRC § 1221(2)), when sold for a gain, the gain is taxed as a capital gain. (IRC § 1231).. . .
a) Gains are capital; losses are ordinary.. . .
b) Gains and losses in a single year must be netted.. . .
c) Gains are converted to ordinary to the extent of recorded losses in the last five years
[here I have a little hypo chart showing 5k 1231 loss in 2007, 3 k of 1231 loss in 2008, and 10k of 1231 gain in 2009. 8k of losses in last five years convert 8k of 2009 gains to ordinary: 8k ordinary gain & 2k capital gain.]. . .
d) gains affected by prior losses. Losses not affected by prior gains.
So the basic answer to your question is yes! "Capital" gets defined differently for depreciation and in 1221(2) and 1231.