Brandon, an individual, began business four years ago and has sold §1231 assets with $5,550 of losses within the last five years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability? Use dividends and capital gains tax rates for reference.

Question

Brandon, an individual, began business four years ago and has sold §1231 assets with $5,550 of losses within the last five years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets:  Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability? Use dividends and capital gains tax rates for reference.

Quizplus · Accepted Answer

To compute Brandon's tax liability, we need to classify the gains and losses as either ordinary, capital or §1231 gains or losses.

The gains and losses that Brandon incurred are as follows:

- Gain on the sale of building: $36,000 - $31,000 = $5,000 §1231 gain
- Loss on the sale of equipment: $3,500 - $5,000 = $1,500 §1231 loss
- Gain on the sale of land: $20,000 - $15,000 = $5,000 §1231 gain
- Loss on the sale of stocks: $11,000 - $15,000 = $4,000 capital loss

Brandon has a net §1231 gain of $8,500 ($5,000 + $5,000 - $1,500), which is greater than his §1231 losses of $5,550. Therefore, the net §1231 gain is treated as long-term capital gain.

Brandon's long-term capital gain is $8,500 and his short-term capital loss is $4,000, resulting in a net capital gain of $4,500. Since Brandon's marginal ordinary income tax rate is 32 percent, his tax liability on the net capital gain is ($4,500 x 15%) = $675.

Brandon's ordinary income consists of his salary and business income, which includes the net §1231 gain of $8,500. Therefore, his total ordinary income is $13,650 ($5,000 + $20,000 - $3,500 - $11,000 + $5,550), and his tax liability on the ordinary income is ($13,650 x 32%) = $4,368.

The total tax liability is the sum of the tax on the net capital gain and the tax on the ordinary income, which is $675 + $4,368 = $5,043. However, Brandon can deduct the net §1231 loss of $5,550 against the ordinary income, resulting in a tax liability of ($5,043 - $5,328) = $285.

Therefore, the best choice is C ($6,400 §1231 gain, $13,650 ordinary income, and $5,328 tax liability).

Brandon, an Individual, Began Business Four Years Ago and Has