Ethan, a sole proprietor, sold the following assets in 2019: $\begin{array}{llrr}
\underline{\text { Asset } }& \underline{\text { Cost }}&\underline{\text { Accumulated Depreciation}}&\underline{\text { Sales Price }}\
\text { Equipment } & \$ 30,000 & \$ 5,000 & \$ 36,000 \
\text { XYZ stock } & \$ 12,000 && \$ 9.000
\end{array}$
The equipment was purchased several years ago but the XYZ stock was purchased as an investment on 3/9/19 and was sold on 11/15/19.Ethan is in the 32% marginal tax bracket for 2019.At the beginning of 2019, 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

Ethan, a sole proprietor, sold the following assets in 2019: $\begin{array}{llrr}
\underline{\text { Asset } }& \underline{\text { Cost }}&\underline{\text { Accumulated Depreciation}}&\underline{\text { Sales Price }}\
\text { Equipment } & \$ 30,000 & \$ 5,000 & \$ 36,000 \
\text { XYZ stock } & \$ 12,000 && \$ 9.000
\end{array}$
 The equipment was purchased several years ago but the XYZ stock was purchased as an investment on 3/9/19 and was sold on 11/15/19.Ethan is in the 32% marginal tax bracket for 2019.At the beginning of 2019, 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?

Quizplus · Accepted Answer

The sale of the equipment results in a gain of $1,000 ($36,000 - $35,000). The sale of the XYZ stock results in a loss of $3,000 ($9,000 - $12,000). The net gain from the sale of these assets is $2,000 ($1,000 + (-$3,000)). This gain is added to Ethan's unrecaptured Section 1231 losses from 2 years ago, resulting in a total net gain of $4,000. This gain is taxed at a rate of 25%, resulting in an additional tax of $1,000.

Ethan, a Sole Proprietor, Sold the Following Assets in 2019