Question

Help please

Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. In 2019, she sells the following long-term assets used in her business: Asset Building Equipment Sales Price $238,680 89,680 Cost $280, 680 148,600 Accumulated Depreciation $52,689 23,609 Lily's taxable income before these transactions is $191,100. What are Lily's taxable income and tax liability for the year? Use Tax Rate Schedule for reference. (Do not round Intermediate calculations. Round your answers to the nearest whole dollar amount.) Amount Description Taxable income Tax liability

Answer 1

Cost price of building = $ 200,600

Less: Accumulated depreciation = $ 52,600

Net book value of building = [ $ 200,600 - $ 52,600 ] = $ 148,000

Selling price of building = $ 230,600

So, net gain on sale of building = $ 230,600 - $ 148,000 = $ 82,600

Cost price of equipment = $ 148,600

Less: accumulated depreciation = $ 23,600

Net book value of equipment = [ $ 148,600 - $ 23,600 ] = $ 125,000

Selling price of equipment = $ 80,600

So, net loss on sale of equipment = $ 125,000 - $ 80,600 = $ 44,400

Calculation for taxable income:

Particulars	Amounts
Gain on sale of building	$ 82,600
Less: loss on sale of equipment	$ 44,400
Net capital gain	$ 38,200

Total taxable income [after net capital gains] = $ 191,100 + $ 38,200 = $ 229,300

Tax liability of sole proprietorship is equal to the owner's personal income tax liability. Which is 10% to 37% range in 2019.

Alternative 1:

Assumption : Here it has been assumed that time from purchase to sale of capital assets are less than 1 year.

For that reason net capital gain consider as short term capital gain. Short term capital gain tax rate is equal to ordinary personal income tax rate.

Calculation for tax liability in 2019

Range of taxable income	Tax rate	Amount of tax
$ 0 to $ 9,700	10%	$ 970
$ 9,701 to $ 39,475	12%	$ 3,573
$ 39,476 to $ 84,200	22%	$ 9839.5
$ 84,201 to $ 160,725	24%	$ 18,366
$ 160,726 to $ 204,100	32%	$ 13,880
$ 204,101 to $ 229,300	35%	$ 8,820
Tax liability		$ 55,448.5

Alternative 2:

Assumption : It has been assumed that time from purchase to sale of assets is more than 1 year.

So, net capital gain consider as long capital gain.Long term capital gain tax liability is $ 0 on net capital gain amounted to $ 38,200.

Long term capital gain tax is $ 0 on income ranging from $ 0 to $ 39,375.

Calculation for tax liability

Range of taxable income	Tax rate	Amount of tax
$ 0 to $ 9,700	10%	$ 970
$ 9,701 to $ 39,475	12%	$3,573
$ 39,476 to $ 84,200	22%	$ 9,839.5
$ 84,201 to $ 160,725	24%	$ 18,366
$ 160,726 to $ 191,100	32%	$ 9,720
Total tax liability		$ 42,468.5