A taxpayer purchased business machinery on Feb 16, 2012, for $25,000. The machin

Question

A taxpayer purchased business machinery on Feb 16, 2012, for $25,000. The machinery was sold for $26,000 on Nov 10, 2013. Depreciation information is as follows: Accelerated depreciation taken $9,000 Straight-line depreciation (7-year life) would have been $5,000 What is the gain or loss on the sale of this machinery, and how will it be treated on the tax return? 1)$4,000 ordinary income and $6,000 section 1231 gain. 2)$4,000 ordinary income and $6,000 long term capital gain. 3)$9,000 ordinary income and $1,000 section 1231 gain. 4)$9,000 ordinary income and $1,000 long term capital gain. 5)none of the above.

Explanation / Answer

Accordingn to section 1231 gain, Gain wii be $1,000(26,000 - 25,000) as the asset is machinery and also held for more than one year.

-Book value for taxation purpose = 25,000 - 9,000 = $16,000

Ordinary gain = 26,000 - 1,000 - 16,000 = $9,000

Thus, Option 3 is correct

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