In 2014, Mary sells for $15,000 a machine used in her business. The property was

Question

In 2014, Mary sells for $15,000 a machine used in her business. The property was purchased on May 1, 2012, at a cost of $12,500. Mary has claimed depreciation on the machine of $4,750. What is the amount and nature of Mary's gain as a result of the sale of the machine? a. $7,250 Section 1231 gain. b. $7,250 ordinary income under Section 1245. c. $2,500 ordinary income and $4,750 Section 1231 gain. d. $2,500 Section 1231 gain and $4,750 ordinary income under Section 1245. e. None of these choices are correct

Explanation / Answer

Original Cost = 12500

Depreciation = 4750

WDV (12500 -4750) = 7750

Selling Price = 15000

Gain ( 15000 - 7750) = 7250

As per Section 1245 , If the sale of property is less than the depreciation or amortization on the property, or if the gains on the sale of the property is less than the original cost , then the gains are recorded as normal income and are taxed as such. If the gain on the sale of the property is greater than that original cost then those gains are taxed as capital gains.

Hence as per the above , gains are 7250 and the original cost is 12500 , as gains are lesser than the original cost , the gains are recorded as ordinary income.

Hence Option B is correct

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