Brandon,an individual,began business four years ago and has never sold a §1231 asset.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 never sold a §1231 asset.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

According to the information given, Brandon has never sold a §1231 asset before. Therefore, all of the assets sold in the current year will be treated as ordinary income.

The total amount of gains from the sales is $7,000 ($1,000 + $2,000 + $4,000). However, since the losses from the sales do not exceed the gains, none of the gains will be reclassified as §1231 gains.

Therefore, the entire $7,000 gain will be treated as ordinary income and taxed at Brandon's marginal ordinary income tax rate of 35%. This results in a tax liability of $2,450 ($7,000 x 0.35).

However, the question asks for the effect of both gains and losses on Brandon's tax liability. Since none of the losses exceed the gains, only the gains will be taxed. Therefore, only the $6,000 of ordinary income will increase Brandon's tax liability, resulting in a tax liability of $2,100 ($6,000 x 0.35).

Thus, choice B is the correct answer.

Brandon,an Individual,began Business Four Years Ago and Has Never Sold