Brandon, an individual, began business four years ago and has sold §1231 assets with $5,100 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 $5,100 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 first need to calculate his gains and losses for the current year.

- Brandon sold a building for $75,000, which he had purchased for $50,000. This results in a §1231 gain of $25,000.
- Brandon also sold some equipment for $20,000, which he had purchased for $15,000. This results in a §1231 gain of $5,000.

So in total, Brandon has a §1231 gain of $30,000 for the current year.

Now we need to determine how these gains and losses affect Brandon's tax liability. Since Brandon has a net §1231 loss of $5,100 over the past five years, any current year gains will be treated as ordinary income. Therefore, we need to determine how much of Brandon's current year gains are treated as ordinary income and how much are treated as capital gains.

The total amount of capital gains is the lesser of:
- The current year §1231 gains of $30,000, OR
- The net §1231 losses over the past five years of $5,100.

Since $5,100 is less than $30,000, all of Brandon's current year §1231 gains are treated as long-term capital gains.

Therefore, Brandon's taxable income for the year is:
- $5,000 (long-term capital gain on the equipment)
- $25,000 (long-term capital gain on the building)
- $12,300 (ordinary income from the net §1231 gain in prior years)
- $2,000 (dividend income)

This gives a total taxable income of $44,300. At a marginal tax rate of 32%, this gives a tax liability of $14,144. However, since Brandon has already paid $8,438 in estimated taxes, his total tax liability for the year is $5,706.

So the answer is C: $11,800 §1231 gain, $12,300 ordinary income, and $5,706 tax liability.

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