Quidik Corporation sold a machine for $80,000 that it had acquired three years ago for $68,000.If its adjusted basis when sold was $50,000,what should Quidik report on its tax return as a result of this sale?
A)Section 1245 recapture of $18,000;Section 1231 gain of $30,000;
B)Ordinary income = $12,000 and Section 1231 gain = $18,000
C)Section 1245 recapture = $18,000 and Section 1231 = $12,000;
D)Section 1231 gain = $38,000

Question

Quizplus · Accepted Answer

To determine the tax treatment of the sale, we first need to calculate the amount of depreciation deduction that Quidik claimed on the machine. Assuming straight-line depreciation over three years, the annual depreciation would be ($68,000 - $50,000) / 3 = $6,000. Therefore, the total depreciation claimed would be $6,000 x 3 = $18,000.

Since the machine was held for more than one year, the gain on the sale qualifies for Section 1231 treatment. The sale results in a Section 1231 gain of $80,000 - $50,000 = $30,000.

However, the portion of the gain attributable to depreciation recapture under Section 1245 must be treated as ordinary income. The amount of recaptured depreciation is $68,000 - $50,000 = $18,000.

Therefore, Quidik should report a Section 1245 recapture of $18,000 as ordinary income and a Section 1231 gain of $12,000 on its tax return, for a total gain of $30,000. Choice C is the only option that correctly reflects these calculations.

Quidik Corporation Sold a Machine for $80,000 That It Had