Question

Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. This year, she sells the following long-term assets used in her business:

Asset	Sales Price	Cost	Accumulated Depreciation
Building	$336,900	$296,500	$65,500
Equipment	$119,500	$204,700	$31,600

Lily's taxable income before these transactions is $207,000.

What are Lily's taxable income and tax liability for the year? Use Tax Rate Schedule for reference. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

Answer 1

Answer:

Assets	Sale Price	Adjusted Basis	Gain/(loss)	Character
Building	336900	231000	105900	$65500 is Unrecaptured §1250 $40400 is §1231
Equipment	119500	173100	(53600)	(53600) §1231

Netting: The $40400 §1231 gain is offset by the $53600 §1231 loss. The remaining $13200 loss then reduces the unrecaptured §1250 gain of $65500 to $52300. This gain will be taxed at 25 percent.

Taxable income before transactions                                                                $ 207000

Unrecaptured §1250 gain                                                                                    52300

Taxable income                                                                                             $259300

Tax liability Ordinary Income: (259300 – 52300) = $207000

                                                ($207000 –85,650) × 28% +$17,442.50=                   $51420.50

Capital gain: $52300 × 25%                                                                                       $13075

Total Tax Liability                                                                                                    $64495.50