Eric Purchased a Building in 2005 That He Uses in His

question 37

Multiple Choice

Eric purchased a building in 2005 that he uses in his business.Eric uses the straight-line method for the building.Eric's original cost for the building is $420,000 and cost-recovery deductions are $120,000.Eric is in the top tax bracket and has never sold any other business assets.If the building is sold for $560,000,the tax results are

• A)$260,000 Sec.1231 gain,all taxable at 20%.
• B)$260,000 unrecaptured Sec.1250 gain,all taxable at 25%.
• C)$260,000 Sec.1231 gain,of which $120,000 is unrecaptured Sec.1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.
• D)$120,000 Sec.1245 ordinary income,$140,000 Sec.1231 gain taxable at 20%.

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Definitions:

Earnings

The net amount of money a company earns during a specific period, often reported quarterly or annually, indicating its profitability.

Market-capitalization Rate

A valuation ratio determined by dividing the market capitalization of a company by its after-tax earnings, reflecting how much investors are willing to pay for a share of the company's earnings.

Plowback Ratio

The proportion of earnings retained by a company for reinvestment in its operations rather than being paid out as dividends to shareholders.

Expected ROE

The projected Return on Equity, estimating the amount of net income returned as a percentage of shareholders' equity.