Brandon, an individual, began business four years ago and has sold §1231 assets

Question

Brandon, an individual, began business four years ago and has sold §1231 assets with $5,950 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

None of the choices are correct.

$14,850 §1231 gain, $1,600 ordinary income, and $2,788 tax liability.

$16,450 ordinary income, $5,758 tax liability.

$16,450 §1231 gain and $2,468 tax liability.

$1,600 §1231 gain, $14,850 ordinary income, and $5,438 tax liability.

Asset Original Cost Accumulated Depreciation Gain/Loss Machinery $ 31,900 $ 8,900 $ 10,950 Land 59,000 0 29,500 Building 128,000 39,000 (24,000 )

Explanation / Answer

Answer is option A None of the choices are correct.

Depreciation recapture of $8900 becomes ordinary income. In addition,Brandon has a $31550 (10950+29500-8900) §1231 gain and $5,950 §1231 loss, which nets to an $25,600 net §1231 gain. The §1231 look-back rule recharacterizes$24,000 of the §1231 gain to ordinary income. Thus, $32900 (24000+8900) (35%) of ordinary income and $1600 (15%) of §1231 gain. The calculations result in $11755 of tax

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