Brandon, an individual, began business four years ago and has sold §1231 assets
ID: 2581361 • Letter: B
Question
Brandon, an individual, began business four years ago and has sold §1231 assets with $5,900 of losses within the last 5 years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets:
Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?
Multiple Choice
$2,200 §1231 gain, $14,700 ordinary income, and $5,475 tax liability.
$16,900 ordinary income, $5,915 tax liability.
$16,900 §1231 gain and $2,535 tax liability.
$14,700 §1231 gain, $2,200 ordinary income, and $2,975 tax liability.
None of the choices are correct.
Asset Original Cost Accumulated Depreciation Gain/Loss Machinery $ 31,800 $ 8,800 $ 10,900 Land 58,000 0 29,000 Building 126,000 38,000 (23,000 )Explanation / Answer
Answer: $16,900 ordinary income, $5,915 tax liability.
Explanation:
Under section 1245, the income can be recognized as ordinary income to the extent of depreciation recapture. In case there is excess of ordinary income over the recapture potential then such excess of income is characterized as section 1231 gain.
Machinery: $8800 accumulated depreciation - $10900 gain = $2100 characterized as sec.1231 gain and $8800 is sec. 1245 gain.
Building: Now, loss on sale of building is $23000 is off set against $2100 gain under sec. 1231 on machinery.
So remainder loss of $20900 can be set off against $8800 ordinary gain from machinery.
Now remains $12100 loss to be set off.
Land: Gain on sale of land is $29000. This can be used to set off the remainder loss of $12100. Hence, the resultant amount of $16900($29000 -$12100) is ordinary income.
The tax rate given is 35 percent.
Tax liability = $16900 * 35 % = $5915