[hopefulcpa28]

I’m always confused between these two?

The way I’m understanding is that:

Capital Assets: Real & Personal property that are for personal use

Non-Capital: Real & Personal property that are held/used for business.

Am I right? Does anyone have better way of understanding/explaining it?

[superdope]

capital assets also include real&personal property for investment purposes.

[Anonymous]

Includes: investment property and property held for personal use

Excludes: inventory for sale in normal course of business; depreciable or real property used in business; copyrights or artistic stuff (e.g. music) produced by the taxpayer, (EXCEPT they are capital assets if you, the taxpayer, buy them, HOWEVER patents are capital assets if you are the inventor); accounts or notes receivable in normal course of business, US govt. publications that you acquire other than by puchase at regular price, supplies used in the course of business, and non-compete agreements.

Yes, you can get questions on the oddball items.

[ahgandar]

Non Capital Assets are:

Inventory

Receivables

Copyrights (originally held)

Depreciable property used in a trade or business

Government publications

Everything else is a Capital Asset, as long as it is not used as trade or business.

(pronounced EERK DIG)

BEC 78 (11/28/2011); 71 (1/28/2010)
AUD 75 (11/05/2010); 73 (11/23/2009)
FAR 77 (08/08/2011; 70 (04/28/2011); 64 (02/28/2011)
REG 77,(11/12/2011); 77 (10/31/2009) Expired

Done after two years

[Yvonne570]

I have my test coming up and was totally thrown too. However, I found this to make it stick. Anything used for personal use and not business use. They don't want us to get it confused with business use as this pertains to the capital assets for schedule D on the 1040. They don't want us to intermingle the concept with self employed or passive activities as examiners want to throw us off.

1040 – personal and any capital asset/loss tied to 1040 – personal

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[hopefulcpa28]

Thank you so much everyone!!

Quick question: How is patent (if you invent it) capital asset? Do we assume that the inventor won't sell it..?

[Yvonne570]

Patents are not capitalized under the individual capitalization rules. These are amortized business items. They will try to trick you. If you are an individual who invented something that legally was protected by a patent, then that would be more of a business – not personal item.

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[The Ace]

hopeful,

A patent is really only a capital asset because the IRS left it off the list of non-capital assets and everything thats not on that list is a capital asset.

Whats crazy is that actually both the patent and the income from said patent are capital assets. Say if I create a patent for a new set of headphones and license my patent exclusively to Sony, I dont pay ordinary income rates on this, but capital gain rates on the actual income generated every year and not just at time of sale.

The hardest part is remembering that a patent is a capital asset, but copyrights and the like are not. I might be wrong in this but I wonder what major corporations were behind getting that bill through congress? pharmacies anyone?

FAR - 79 - 11/24/10
AUD - 85 - 2/19/11
BEC - 83 - 7/25/11
REG - 74 - 8/22/11 Rematch 11/21/11
IL Candidate

[hopefulcpa28]

[hopefulcpa28]

So patents are non-capital, right? That's what I assume.

But dianapage, posted this:

[capital assets] Excludes: inventory for sale in normal course of business; depreciable or real property used in business; copyrights or artistic stuff (e.g. music) produced by the taxpayer, (EXCEPT they are capital assets if you, the taxpayer, buy them, HOWEVER patents are capital assets if you are the inventor); accounts or notes receivable in normal course of business, US govt. publications that you acquire other than by puchase at regular price, supplies used in the course of business, and non-compete agreements.

I'm confused haha

[hopefulcpa28]

Thank you, Ace. I get it now!!!

[The Ace]

hopeful,

another good way to think about copyrights is the michael jackson rule (this is not entirely true as MJ purchased publishing rights which is different and beyond the scope of the exam, but for the sake of you never forgetting it on the exam):

– all of the music he created was NOT a capital asset to him

– all of the beatles copyrights he purchased WERE capital assets to him

FAR - 79 - 11/24/10
AUD - 85 - 2/19/11
BEC - 83 - 7/25/11
REG - 74 - 8/22/11 Rematch 11/21/11
IL Candidate

[hopefulcpa28]

I understand the copyrights concept.

I'm bit confused on patents. If you were the inventor, wouldn't that be NON capital assets.

But the earlier posting said, it's a capital assets.

[The Ace]

Because patents are specifically left off the list of noncapital assets they ARE capital assets to individuals.

However, the only time it would really be a non capital asset is if that individual is a professional inventor the patent would be considered inventory which is not a capital asset but inventory.

If I am a business and I own a patent it would fall under the section 1231 rules like any other assets sold in a trade or business.

FAR - 79 - 11/24/10
AUD - 85 - 2/19/11
BEC - 83 - 7/25/11
REG - 74 - 8/22/11 Rematch 11/21/11
IL Candidate

[Yvonne570]

Try not to confuse individual and business items and throw out what you learned in FAR because taxation is another game. What is defined as a capital asset to GAAP is not the same as the IRS's definition.

For individuals, capital assets can include investments in stock. Almost everything you own and use for personal purposes, pleasure, business or investment is a capital asset, including:

Your home

Household furnishings

Stocks or bonds

Coin or stamp collections

Gems and jewelry

Gold, silver or any other metal, and

Business property

Noncapital Assets

A noncapital asset is property that is not a capital asset. The following kinds of property are not capital assets.

Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Inventories are discussed in Publication 538, Accounting Periods and Methods. But, see the Tip below.

Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1).

Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Sales of this type of property are discussed in chapter 3.

Real property used in your trade or business or as rental property, even if the property is fully depreciated.

A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs):

Created by your personal efforts,

Prepared or produced for you (in the case of a letter, memorandum, or similar property), or

Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced.

https://www.irs.gov/publications/p544/ch02.html

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[Yvonne570]

In essence, you cannot resell a patent or give a patent away as a gift. It's seen as an expense to the IRS.

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[Author]

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