Question

Garrison Printing Company, a sole proprietorship owned by Jim Garrison (a calendar-year taxpayer, cash-basis taxpayer) has 2019 before tax income of $600,000 generated from completing orders that involve printing on t-shirts and hats. Garrison also sold the following assets during 2019:

1. Unprinted t-shirts and hats (i.e. inventory) with a cost basis of $85,000 were sold for $120,000.
2. Stocks (held longer than 12 months) with a cost basis of $25,000 were sold for $10,000.
3. A printing machine (held longer than 12 months) with a cost basis of $15,000 and accumulated tax depreciation of $8,000 was sold for $10,000.
4. An embroidery machine (held longer than 12 months) with a cost basis of $6,000 and accumulated tax depreciation of $3,000 was sold for $4,000.
5. A storage building (placed in service in 2006) with a cost basis of $30,000 and accumulated tax depreciation of $8,000 was sold for $35,000.
6. Furniture (held longer than 12 months) with a cost basis of $7,000 and accumulated tax depreciation of $4,000 was sold for $10,000.

Garrison has unrecaptured net Section 1231 losses of $3,500 during the previous 5 years. Determine the amount AND character of Garrison’s 2019 taxable gain/loss generated from these transactions.

	Calculation	G/L =	Ordinary +	Section 1231+	Capital
a)
b)
c)
d)
e)
f)

Answer 1

Section 1231 deals with tax treatment of gains and losses arising on sale of depreciable property used in the business and held for a period of more than one year.

Therefore point a and b will be not be covered under sction Section 1231 as they are stock in trade of business. However, such gain or losses are revenue in nature unlike section 1231 which are capital in nature.

Calculation of Gain or loss for each point:

A) Sale of T Shirt and hat = Sale Proceeds - Cost

= 120000 - 85000

=$35000 ( Revenue/Ordinary Gain)

B) Sale of Inventory = 10000 - 25000

= - $15000 (Revenue/Ordinary Loss)

Total Revenue/Ordinary Gain(A)+(B) = $20000

C) Sale of Printing Machine = Sale Proceeds - ( Cost - Accumulated Deprecation)

= 10000 - ( 15000 - 8000)

= $3000 ( Capital Gain)

D) Sale of Embroidery Machine = Sale Proceeds - ( Cost - Accumulated Deprecation)

= 4000 - ( 6000 - 3000)

= $1000 ( Capital Gain)

E) Sale of Storage Building = Sale Proceeds - ( Cost - Accumulated Deprecation)

= 35000 - ( 30000 - 8000)

= $13000 ( Capital Gain)

F) Sale of Furniture = Sale Proceeds - ( Cost - Accumulated Deprecation)

= 10000 - ( 7000 - 4000)

= $7000 ( Capital Gain)

Total Capital Gain(C)+(D)+(E)+(F) = $24000

Total Gain = Revenue/Ordinary + Section 1231 + Capital Gain

= 20000 - 3500 + 24000

=$40500