Brandon,an Individual,began Business Four Years Ago and Has Sold §1231

question 75

Multiple Choice

Brandon,an individual,began business four years ago and has sold §1231 assets with $5,000 of losses within the last 5 years.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?

• A)$25,000 ordinary income,$8,750 tax liability.
• B)$25,000 §1231 gain and $3,750 tax liability.
• C)$13,000 §1231 gain,$12,000 ordinary income,and $6,150 tax liability.
• D)$12,000 §1231 gain,$13,000 ordinary income,and $6,350 tax liability.
• E)None of thesE.Depreciation recapture of $7,000 becomes ordinary income.In addition,Brandon has a $23,000 §1231 gain and $5,000 §1231 loss,which nets to an $18,000 net §1231 gain.The 1231 lookback rule recharacterizes $5,000 of the §1231 gain to ordinary income.Thus,$12,000 (35%) of ordinary income and $13,000 (15%) of §1231 gain.The calculations results in $6,150 of tax.

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Definitions:

Market Value

The going rate for an asset or service to be either bought or sold in a marketplace.

Weighted-average

A method of calculating an average that accounts for the varying significance (weights) of different items in the dataset.

Common Shares

A type of equity security that represents ownership in a corporation, with holders possibly entitled to dividends and voting rights.

Net Income

The ultimate earnings of a corporation after reducing total income by any expenses, taxes, and costs.