Question

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 $10,000 1231 loss on the sale. The second is land that will generate a $7,000 1231 gain on the sale. Aruna's ordinary marginal tax rate is 32 percent.

Question: 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?

Please Show calculations and explain marginal tax rate.

Answer 1

solution,

given data

Aruna, wants to sell two assets that she no longer needs for her business.

the Both assets qualify as 1231 assets. The first is machinery and will generate a $10,000 1231 loss on the sale.

The second is land that will generate a $7,000 1231 gain on the sale. Aruna's marginal tax rate is 32 %

character	amount	rate	tax
1231 gain-capital(year-1)	7000	15%	1050
1231 loss-ordinary(year)	10000	32%	3200
			(2150)

Arunas tax increases in year 1 by $1050

Arunas tax decreases in year 2 by $3200