Brandon, an individual, began business four years ago and has sold §1231 assets with $5,950 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 $5,950 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

First, we need to calculate the gain or loss for each asset sold in the current year:

- Building: sale price of $60,000 minus adjusted basis of $35,000 = §1231 gain of $25,000.
- Vehicle: sale price of $20,000 minus adjusted basis of $15,000 = §1231 gain of $5,000.
- Computer: sale price of $10,000 minus adjusted basis of $8,000 = §1231 gain of $2,000.

Next, we need to calculate Brandon's net §1231 gain or loss for the year:

- §1231 gains: $25,000 + $5,000 + $2,000 = $32,000.
- §1231 losses: None in the current year, but $5,950 within the last five years.

Since Brandon has a net §1231 gain for the year, it is treated as long-term capital gain. We need to calculate the tax liability on this gain, as well as on Brandon's ordinary income.

- Long-term capital gains tax rate: 20 percent.
- Ordinary income tax rate: 32 percent.

So, the tax liability for the year is:

- Long-term capital gains tax: $32,000 x 0.2 = $6,400.
- Ordinary income tax: ($100,000 - $32,000) x 0.32 = $22,080.
- Total tax liability: $6,400 + $22,080 = $28,480.

However, we also need to account for the §1231 losses within the last five years. These losses are treated as ordinary losses up to a limit of $3,000 per year, and any excess can be carried forward to future years.

- Brandon has §1231 losses of $5,950 within the last five years.
- In the current year, he can deduct up to $3,000 of these losses against ordinary income.
- So, his taxable ordinary income is reduced by $3,000, from $100,000 to $97,000.
- The tax liability on this reduced ordinary income is: $97,000 x 0.32 = $31,040.
- However, since Brandon's total tax liability cannot be less than his long-term capital gains tax, the actual tax liability is: $28,480.

Therefore, the correct answer is C: $1,600 §1231 gain, $14,850 ordinary income, and $4,992 tax liability.

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