Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last 5 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 5 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

Depreciation recapture of $7,000 becomes ordinary income. In addition, Brandon has a $23,000 §1231 gain and $5,000 §1231 loss, which nets to an $18,000 net §1231 gain. The §1231 look-back rule recharacterizes $5,000 of the §1231 gain to ordinary income. Thus, $12,000 (32 percent) of ordinary income and $13,000 (15 percent) of §1231 gain. The calculations result in $5,790 of tax.

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