Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. Thi

Question

Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. This year, she sells the following long-term assets used in her business

: Asset Sales Price Cost Accumulated Depreciation Building$247,700 $211,500 $69,500Equipment $95,500 $177,600 $26,700Lily's taxable income before these transactions is $222,000.

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 final answers to the nearest whole dollar amount.)

Taxable Income =

Tax Liability =

Explanation / Answer

Calculation of Lily's taxable income :-

Gain/(Loss)

(d-c)

$69,500 is unrecaptured §1250

$36,200 is §1231

Netting: The $36,200 §1231 gain is offset by the $55,400 §1231 loss. The remaining ($55,400-$36,200) $19,200 loss then reduces the unrecaptured §1250 gain of $69,500 to $50,300. This gain will be taxed at 15%.

Taxable Income before transactions $222,000

Unrecaptured §1250 gain $50,300

Taxable Income $272,300

Tax Liability

Ordinary Income ($272,300-$50,300) = $222,000

[($222,000-$191,650)*33%]+$46,643.75 = $56,659

Capital gain $50,300*15% = $7,545

Total tax liability = ($56,659+$7,545) = $64,204

Asset Sales Price (d) Cost (a) Accumulated Depreciation (b) Adjusted Basis (c = a-b)

Gain/(Loss)

(d-c)

Character of gain/(loss)   Building 247,700 211,500 69,500 142,000 105,700

$69,500 is unrecaptured §1250

$36,200 is §1231

Equipment 95,500 177,600 26,700 150,900 (55,400) $(55,400) is §1231

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