Question

Marina has been in business for six years and has never sold a Section 1231 asset. Marina owned each of these assets thas Marina sold in 2019 for more than five years:

Asset	Original Cost		Accumulated Depreciation		Gain/Loss
Machinery	$	12,000	$	7,000	$	6,000
Furniture		10,000		2,000		(3,000	)
Building		90,000		20,000		15,000

Assuming that Marina's marginal ordinary tax rate is 34 percent, what is the character of the gains and losses and what affect do they have on Suzanne's tax liability? Be specific! Show your work!

Answer 1

Given Marina is in business and Marginal Ordinary Tax rate is 34%
	A	B	C=A-B	D
Assets	Original cost ($)	Accumulated depreciation ($)	Book value	Gain/(Loss) ($)	Tax rate
Machinery	12000	7000	5000	6000	15%
Furniture	10000	2000	8000	-3000	Treated as ordinary loss
Building	90000	20000	70000	15000	15%
Rules:
A gain on the sale of Section 1231 business property is treated as long-term capital gain and is taxed at a maximum rate of 15%. A loss on the sale of Section 1231 business property is treated as ordinary loss and can reduce ordinary income on the Taxpayer's return and is not subject to the capital loss limitations ($3,000 limitation for individuals).   However if company sells business property at a gain and they have deducted ordinary losses due to the sale of Section 1231 property in that past five years then the Section 1231 gain that you recognize will be taxed as ordinary income, using the Taxpayer's ordinary income rate, and not the preferential 15% maximum capital gain rate.
Answer
From the above explanation, it is clear that Gain has to be treated as "Long term Capital Gain" and is taxed at maximum rate of 15%
Also, It was given that company has not sold any 1231 assets in the past five years, Capital loss shall be treated as ordinary loss and can reduce ordinary income of the Tax payer's.