Albert's sole proprietorship owns the following assets. $\begin{array}{lrr}&\text { Adjusted Basis Fair }&\text { Market Value }\
\text { Accounts receivable } & \$-0- & \$ 60,000 \
\text { Inventory } & 20,000 & 30,000 \
\text { Machinery and equipment* } & 50,000 & 90,000 \
\text { Buil dings** } & 120,000 & 170,000 \
\text { Land } & 80,000 & 140,000 \
& \$ 270,000 & \$ 490,000
\end{array}$ * 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.

Question

Quizplus · Accepted Answer

Albert's recognized gain is the difference between the selling price ($500,000) and the adjusted basis of the assets ($270,000), which equals $230,000. The gain is split between ordinary income and capital gain. The ordinary income portion includes the recapture of depreciation on machinery and equipment (§ 1245 recapture) of $45,000 and the excess of the fair market value over the adjusted basis for accounts receivable ($60,000), totaling $105,000. The remaining gain is treated as capital gain. However, the correct calculation for ordinary income should include the full recapture potential ($45,000) plus the accounts receivable ($60,000), which equals $105,000, not $110,000 as stated. The error in the choices provided suggests a misinterpretation or typo, but based on the logic of tax treatment, the closest correct answer would involve recognizing both ordinary income and capital gain, with ordinary income from recapture and accounts receivable.

Albert's Sole Proprietorship Owns the Following Assets * Potential § 1245 Recapture of $45,000