[The following information applies to the questions displayed below.] Aruna, a s

Question

[The following information applies to the questions displayed below.]

Aruna, a sole proprietor, wants to sell two assets that she no longer needs for her business. Both assets qualify as §1231 assets. The first is machinery and will generate a $22,500 §1231 loss on the sale. The second is land that will generate a $7,400 §1231 gain on the sale. Aruna’s ordinary marginal tax rate is 30 percent. (Input all amounts as positive values.)

a. Assuming she sells both assets in December of year 1 (the current year), what effect will the sales have on Aruna’s tax liability?

b. Assuming that Aruna sells the land in December of year 1 and the machinery in January of year 2, what effect will the sales have on Aruna’s tax liability for each year?

Explanation / Answer

Part A

If sold in same year than netting effect would be there and net decrease in tax would be :

Amount Tax Rate Tax amount Loss on sale of machinery(Ordinary Loss) $22,500.00 30% $(6,750.00) Gain on sale of land(ordinary gain) $7,400.00 30% $2,220.00 Net decrease in Tax $(4,530.00)

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