Ethan, a sole proprietor, sold the following assets in 2017: $\begin{array}{llll}\text { Asset } &\text { Cost } &\text { Accumulated Depreciation }&\text { Sales Price }\
\text { Equipment } & \$ 30,000 & \$ 5,000 & \$ 36,000 \
X Y Z \text { stock } & \$ 12,000 && \$ 9,000
\end{array}$ The equipment was purchased several years ago but the XYZ stock was purchased as an investment on 3/9/17 and was sold on 11/15/17. Ethan is in the 33% marginal tax bracket for 2017. At the beginning of 2017, he had $2,000 of unrecaptured Section 1231 losses from 2 years ago. How much additional tax will Ethan pay as a result of these transactions?

Question

Quizplus · Accepted Answer

The equipment sale results in a gain of $11,000 ($36,000 - $25,000 adjusted basis), taxed as ordinary income due to depreciation recapture. The stock sale results in a short-term capital loss of $3,000 ($9,000 - $12,000). The net gain is $8,000 ($11,000 - $3,000), taxed at 33%, resulting in $2,640 tax. However, the unrecaptured Section 1231 losses offset $2,000 of the gain, reducing the taxable gain to $6,000, leading to $1,980 tax. The additional tax is $2,460 ($1,980 + $480 from recapture).

Ethan, a Sole Proprietor, Sold the Following Assets in 2017