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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:

Asset Original Cost Accumulated Depreciation Gain/Loss
Machinery $30,000 $7,000 $10,000
Computers 10,000 6,000 (2,000)
Building 90,000 20,000 (2,000 )

Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability?

a. $7,000 ordinary income, $1,000 §1231 loss and $2,100 tax liability.
b. $6,000 ordinary income and $2,100 tax liability.
c. $7,000 §1231 gain and $2,450 tax liability.
d. $7,000 §1231 gain and $1,050 tax liability.
e. None of these.

Answer :

Answer:

Let's look at how the asset disposal Account of Brandon would look.

Machinery Original costs $30,000

Computers Original Costs $10,000

Building Original costs $90,000

Total costs $130,000

Accumulated depreciation:

Machinery $7,000

Computers $6,000

Buildings $20,000

Total $33,000

Net book value $97,000

Net gain from sales $6,000

Sales of Assets (cash receipt) = $103,000

At the point of sales, the Asset will be treated in tax like a regular sales and written down value deducted from it to determine if the sale was at a gain or a loss.

Gains are taxed as additional income and losses are deductibles from the net income.

The gains in this instance total $6,000 will form an addition to Net income

And the tax implication is $1,920 (32% marginal ordinary income tax rate)

The answer is E, it is not listed in the answers above.

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