Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 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 $5,000 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 determine Brandon's tax liability, we need to calculate his net §1231 gain or loss for the year. Let's start by calculating his gains and losses for the year:

§1231 Gain: $80,000 - $60,000 - $10,000 = $10,000
§1231 Loss: $8,000

Since Brandon has a net §1231 gain for the year, we need to classify it as either ordinary income or capital gain. To do this, we need to look at Brandon's §1231 gains and losses for the past five years. Since Brandon has $5,000 in net §1231 losses in the past five years, we can use the current year's net §1231 gain as capital gain.

So, Brandon has a $10,000 long-term capital gain for the year. In addition to this, we also need to consider his other ordinary income. He sold the remaining assets for $25,000, which is treated as ordinary income.

Therefore, Brandon's total ordinary income is $25,000 + $12,000 = $37,000.

Now, we can calculate Brandon's tax liability using the following steps:

1. Calculate Brandon's long-term capital gains tax: $10,000 x 15% = $1,500
2. Calculate Brandon's ordinary income tax: $37,000 x 32% = $11,840
3. Add the two taxes together to get the total tax liability: $1,500 + $11,840 = $13,340

Therefore, the correct answer is C.

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