Brandon, an individual, began business four years ago and has never sold a §1231 asset. 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 32 percent, what effect do the gains and losses have on Brandon's tax liability?

Question

Brandon, an individual, began business four years ago and has never sold a §1231 asset. 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 32 percent, what effect do the gains and losses have on Brandon's tax liability?

Quizplus · Accepted Answer

The depreciation recapture of $7,000 is characterized as ordinary income under §1245. The remaining $3,000 gain on the machinery is §1231 gain. The $4,000 §1231 loss on the computers and building offsets the $3,000 §1231 gain on the machinery. The $1,000 net §1231 loss becomes ordinary and offsets the $7,000 ordinary gain. The remaining ordinary gain of $6,000 is taxed at 32 percent, which results in $1,920 of tax.

Brandon, an Individual, Began Business Four Years Ago and Has