Michael sold machinery used in his business for $50,000. He purchased the equipment three years ago for $55,000 and deducted $22,800 MACRS depreciation through the date of sale. Compute and characterize Michael's gain on sale.

Question

Quizplus · Accepted Answer

To calculate Michael's gain on sale, we need to start with the adjusted basis of the machinery, which is the original purchase price minus the MACRS depreciation claimed.

Adjusted basis = $55,000 - $22,800 = $32,200

Next, we need to determine the amount of the sale proceeds that constitute taxable gain. This is calculated as:

Taxable gain = Amount realized - Adjusted basis

Amount realized = $50,000

Taxable gain = $50,000 - $32,200 = $17,800

Since the machinery was used in Michael's business, the gain is classified as an ordinary gain, not a capital gain. This is because the machinery was considered to be "Section 1245 property," which includes tangible personal property used in a trade or business.

Therefore, the correct answer is C) $17,800 ordinary gain.

Michael Sold Machinery Used in His Business for $50,000