Albert's sole proprietorship owns the following assets: * Potential § 1245 recapture of $45,000.
** Straight-line depreciation was used.
Albert sells his sole proprietorship for $500,000. Calculate Albert's recognized gain or loss and classify it as capital or ordinary.
A) $230,000 ordinary income.
B) $230,000 capital gain.
C) $115,000 ordinary income and $115,000 capital gain.
D) $110,000 ordinary income and $120,000 capital gain.
E) None of the above.

Question

Albert's sole proprietorship owns the following assets:  * Potential § 1245 recapture of $45,000.
** Straight-line depreciation was used.
Albert sells his sole proprietorship for $500,000. Calculate Albert's recognized gain or loss and classify it as capital or ordinary.
A) $230,000 ordinary income. 
B) $230,000 capital gain. 
C) $115,000 ordinary income and $115,000 capital gain. 
D) $110,000 ordinary income and $120,000 capital gain. 
E) None of the above.

Quizplus · Accepted Answer

To calculate the recognized gain or loss on the sale of a business, we need to compare the selling price with the adjusted basis of the assets sold.

In this case, we are given that the potential § 1245 recapture is $45,000. This means that if any of the assets sold were eligible for § 1245 depreciation, we would have to recapture the depreciation as ordinary income. However, we are not given any information on whether this applies to the assets sold.

Assuming the assets sold were not eligible for § 1245 depreciation, we can calculate the adjusted basis as follows:

Adjusted Basis = Cost Basis - Depreciation 
Cost Basis = Selling Price - Potential Recapture 
Cost Basis = $500,000 - $45,000 
Cost Basis = $455,000 
Depreciation = $0 (since straight-line depreciation was used, the accumulated depreciation would equal the potential recapture) 
Adjusted Basis = $455,000 - $0 
Adjusted Basis = $455,000

Albert's recognized gain or loss is then calculated as:

Sale Price - Adjusted Basis = Recognized Gain or Loss 
$500,000 - $455,000 = $45,000

Since the holding period for a sole proprietorship is generally more than one year, the recognized gain or loss is classified as long-term capital gain or loss.

Therefore, the correct answer is D) $110,000 ordinary income and $120,000 capital gain.

Albert's Sole Proprietorship Owns the Following Assets: * Potential