Shasso.......

Thanks for your coke analogy, it was very helpful.

I am having a hard time Reconciling M-1 items , whether to add to book or deduct to tax. Do you have some technique to master it? Does anyone else has a better grasp of it?

I would really appreciate this gesture.

I made that topic for people that  is confusing for them and I hope it helps
 
all property must be used in trade or business for more than 1 year
first section 1231(the boss):

 is comprised of all property under sec 1245 and 1250 (depreciable personal and real property) and also land used in business
it gives u advantage that when u sell a property for a gain it will be capital (low tax rate) and if u sell it for a loss it will be ordinary so u deduct it right away
section 1245:

 (machinery and equipment) depreciable personal property
section 1250:
(building)depreciable real property) an easy way to remember that is building is so high so it takes the highest sec number 1250 instead of 1245
both sec 1245 and 1250 r dealing with gain only and it,s ordinary(opposite to sec 1231)
so let,s see
when u sell a property for a loss (sale price - adjusted basis.) no problem it,s section 1231 ordinary loss cause section 1231 is the only section that deals with losses(let the boss suffers the loss)

when u sell it for a gain all sections are fighting together to get part of the gain
so the gain from sale is the money u have in ur pocket
the reason of dep recapture is knowing if the gain is ordinary or capital


first step:
 see what kind of property u sell if it,s machinery n equipement then it,s sec 1245 and if it,s building it,s sec 1250

secend step:

if it,s sec 1245(machinery and equipment) all accumulated dep. will be section 1245 ordinary gain and the remainder is 1231 capital gain

if it,s section 1250(then fifty fifty -cut the dep. into 2 parts)take only a part of dep. for sec 1245 and leave the remainder for sec 1231  so the excess of accelerated dep. over SL depreciation is sec 1245 ordinary gain and the remainder is sec 1231 capital gain
what if the property is depreciated under the SL method then all the dep is 1231
 example 1
if u sell a machine u bought it 2 years ago for 200,000, adjusted basis 150,000 and u sell it for 210,000
gain=210,000-150,000=60,000
machine>>>sec 1245
all accumulated dep.=200,000-150,000=50,000
so 50,000 of the gain will be sec 1245 ordinary gain and the remainder 10,000 will be sec 1231 capital gain

example 2
now U sell a building u bought it for 200,000 ,u use accelerated depreciation to depreciate it,adjusted bais 150,000
SL dep is 40,000 and u sell it for 210,000
gain=210,000-150,000=60,000
building>>>sec 1250 (fifty fifty)
accelerated dep=200,000-150,000=50,000
excess of accelerated dep over SL=50,000-40,000=10,000
so 10,000 of the gain will be sec1250 ordinary gain and the remainder 50,000 will be sec 1231 capital gain
now what if u use SL dep to depreciate the property then all the gain 60,000 will be 1231 capital gain cause there,s no accelerated dep now so the excess will be zero 

sec 1245 and 1250 is always limited to the gain from the sale(money u have in ur pocket)
Example:
u sell a machinery for 130k ,u bought it 2 yrs ago for 140k,accumulated
dep is 40k
machinery >>>sec 1245
adjusted basis=140k-40k=100k
gain from sale=130k-100k=30k
so all the gain is sec1245 ordinary gain
see picture below



same facts as last example but u sell the machinery for 160k
gain from sale =160k-100k=60k
so 40k is sec 1245 ordinary
20k is sec 1231 capital
see picture below



 

òSec 291 (if u like to know it)
If a corporation sells a sec 1250 property,the ordinary income will increase by 20% of SL dep.
in  example 2 if a corp sells the building
sec291 ordinary gain=sec 1250 gain + 20% of SL dep.
sec 291 ordinary gain=sec 1250 gain 10000+ 20% *40000
=10000+  8000=18000 sec 291 ordinary gain
the remainder of gain 60000-18000=  42000 is sec 1231 capital gain