Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. Thi
ID: 2522136 • Letter: L
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:
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.)
Asset Sales Price Cost Accumulated Depreciation Building $336,900 $296,500 $65,500 Equipment $119,500 $204,700 $31,600Explanation / Answer
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
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
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