Question

Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. In 2018, she sells the following long-term assets used in her business: Asset Sales Price Cost Accumulated Depreciation Building $230,800 $200,800 $52,800 Equipment 80,800 148,800 23,800 Lily's taxable income before these transactions is $161,300. What are Lily's taxable income and tax liability for the year? Use Tax Rate Schedule for reference.

Answer 1

Asset	Sales Price	Adjusted basis	Gain/(Loss)	Character
Building	230,800	148,000	82,800	$52,800 is Unrecaptured §1250 $30,000 is §1231
Equipment	80,800	125,000	-44,200	$(44,200) §1231
Netting: The $30,000 §1231 gain is offset by the $44,200 §1231 loss. The remaining $14,200 loss
then reduces the unrecaptured §1250 gain of $52,800 to $38,600. This gain will be taxed at 15 percent
Taxable income before transactions	161,300
Unrecaptured §1250 gain	38,600
Taxable income	199,900
Tax liability
Ordinary Income:	33,306
($199,900 – $38,600) = $161,300
($161,300 – $157,500) × 32% +$32,089.50
Capital gain: $38,600 × 15%	5790
Total tax liability	39,096