Sergio owns Sergio's Auto Restoration as a sole proprietorship. His business has fallen on hard times and his bank has agreed to reduce the debt on his warehouse from $175,000 to $150,000. The warehouse, which was purchased in 2005 at cost of $190,000, has a fair market value of $160,000 and an adjusted basis of $140,000. Before the debt reduction Sergio's total assets are $680,000 and his total liabilities are $700,000. Discuss the tax effect of the debt reduction and determine the minimum amount of income Sergio must recognize from the discharge.

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The Answer of Sergio owns Sergio's Auto Restoration as a sole proprietorship. His business has fallen on hard times and his bank has agreed to reduce the debt on his warehouse from $175,000 to $150,000. The warehouse, which was purchased in 2005 at cost of $190,000, has a fair market value of $160,000 and an adjusted basis of $140,000. Before the debt reduction Sergio's total assets are $680,000 and his total liabilities are $700,000. Discuss the tax effect of the debt reduction and determine the minimum amount of income Sergio must recognize from the discharge.

Sergio Owns Sergio's Auto Restoration as a Sole Proprietorship