Andrew, an Individual, Began Business Four Years Ago and Has

question 60

Essay

Andrew, an individual, began business four years ago and has never sold a §1231 asset. Andrew owned each of the assets for several years. In the current year, Andrew sold the following business assets: $$\begin{array} { | l | r | r | r | } \hline { \text { Asset } } & \text { Original Cost } & \begin{array} { c } \text { Accumulated } \\\text { Depreciation }\end{array} & \text { Gain/Loss } \\\hline \text { Machinery } & \$ 12,000 & \$ 7,000 & \$ 6,000 \\\hline \text { Furniture } & 10,000 & 2,000 & 3,000 \\\hline \text { Building } & 90,000 & 20,000 & ( 5,000 ) \\\hline\end{array}$$ Assuming Andrew's marginal ordinary income tax rate is 30 percent, what is the character of the gains and losses and what affect do they have on Andrew's tax liability?

---

Definitions:

Dehydration Reaction

A chemical reaction in which two molecules combine to form a larger molecule, with the removal of a water molecule.

Hydrolysis

A process where water splits the bonds within a specific substance through a chemical reaction.

Solubility

The ability of a substance (solute) to dissolve into another substance (solvent), forming a solution at a specific temperature and pressure.

Dissolve

To form a solution by mixing evenly with a liquid, causing a solid to become incorporated into the liquid so it becomes homogeneous.