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 35 percent,what effect do the gains and losses have on Brandon's tax liability?

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 35 percent,what effect do the gains and losses have on Brandon's tax liability?

Quizplus · Accepted Answer

- In the last 5 years, Brandon had §1231 losses of $5,000, which can be netted against his current §1231 gains.
- Brandon sold the building for a §1231 gain of $13,000 and the equipment for a §1231 loss of $1,000. Therefore, his total §1231 gain is $12,000.
- Brandon's §1231 gains and losses are treated as long-term capital gains and losses. Since he had no other capital gains or losses, his net long-term capital gain is $12,000 - $5,000 = $7,000.
- Brandon's taxable income calculation would be:
   - §1231 gain → $7,000
   - Ordinary income from business → $25,000
   - Total taxable income → $32,000
- Brandon's tax liability can be calculated using the capital gains tax rate of 15% for long-term capital gains:
   - Tax on net long-term capital gain → $1,050
   - Tax on ordinary income → $5,100
   - Total tax liability → $6,150
Therefore, the correct option is C.

Brandon,an Individual,began Business Four Years Ago and Has Sold §1231