Keiko sells a piece of equipment used in her business for $14,853 on August 10,2017.The equipment was purchased on January 4,2016 at a cost of $12,849.Keiko has taken $3,855 of depreciation on the equipment.What is the amount and classification of the gain on the sale by Keiko?

Question

Quizplus · Accepted Answer

To determine the gain on the sale, we need to calculate the adjusted basis of the equipment, which is calculated as follows:
Cost of Equipment = $12,849
Less: Accumulated Depreciation = $3,855
Adjusted Basis = $8,994

The amount realized on the sale is $14,853, and the adjusted basis is $8,994. Therefore, the gain on the sale is $5,859 ($14,853 - $8,994).

This gain has two components: ordinary income under Section 1245 and Section 1231 gain.

The ordinary income under Section 1245 is calculated as the lesser of the depreciation taken or the gain on the sale. In this case, the depreciation taken is $3,855, which is less than the gain on the sale of $5,859. Therefore, $3,855 is classified as ordinary income under Section 1245.

The remaining amount of gain is classified as Section 1231 gain, which is capital gain.

Therefore, the correct answer is C.

Keiko Sells a Piece of Equipment Used in Her Business