Question

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Aruna, a sole proprietor, wants to sell two assets that she no longer needs for her business. Both assets qualify as §1231 assets. The first is machinery and will generate a $22,500 §1231 loss on the sale. The second is land that will generate a $7,400 §1231 gain on the sale. Aruna’s ordinary marginal tax rate is 30 percent. (Input all amounts as positive values.)

a. Assuming she sells both assets in December of year 1 (the current year), what effect will the sales have on Aruna’s tax liability?

b. Assuming that Aruna sells the land in December of year 1 and the machinery in January of year 2, what effect will the sales have on Aruna’s tax liability for each year?

Answer 1

Part A

If sold in same year than netting effect would be there and net decrease in tax would be :

	Amount	Tax Rate	Tax amount
Loss on sale of machinery(Ordinary Loss)	$22,500.00	30%	$(6,750.00)
Gain on sale of land(ordinary gain)	$7,400.00	30%	$2,220.00
Net decrease in Tax			$(4,530.00)

Part B
No net effect and gain will be taxed in year 1 and loss in year 2
	Amount	Tax Rate	Tax amount
Gain on sale of land(capital gain)	7400	15%	1110
Loss on sale of machinery(Ordinary Loss)	22500	30%	-6750
Net decrease in Tax			-5640