Question

7) Brandon, an individual, began business four years ago and has sold $1231 assets with $5,000 of losses within the last five years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: Asset Original Cost Accumulated Depreciation Gain/loss Machinery $30,000 $7,000 $10,000 Land 40,000 20,000 Building 90,000 20,000 (5000) Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability? Use dividends and capital gains tax rates for reference. A) $25,000 ordinary income and $8,000 tax liability B) $25,000 $1231 gain and $3,750 tax liability C) $13,000 $1231 gain, $12,000 ordinary income, and $5,790 tax liability D) $12,000 $1231 gain, $13,000 ordinary income, and $5,960 tax liability

Please provide a detail step by step explanation of how you broke down the depreciation recapture and solved for the section 1231 gain.

Answer 1

Answer:

C)$13000 sec 1231 gain, $ 12000 ordinary income, and $5790 tax liability

	$	$
Gain on Sale of Machinery		10000
Gain on Sale of Land		20000
Loss on Sale of Building		-5000
Net Gain		25000
How to Report the $25,000 Gain
Recaptured depreciation for Machinery: Report as Ordinary income Note: Building had a loss, therefore, no recapture	7000
Recaptured Net section 1231 losses for the previous five years: Report as Ordinary income	5000
Portion of Gain Reported as Ordinary Income		12000
Portion of section 1231 Gain Reported as Long-Term Capital Gain (25000-12000)		13000

Tax Liability
On Portion of Gain Reported as Ordinary Income (12000*32%)		3840
On Portion of section 1231 Gain Reported as Long-Term Capital Gain (13000*15%)		1950
Total		5790

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