Question

Just need the tax liability and how you got it!!

Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. In 2019, she sells the following long-term assets used in her business: Asset Building Equipment Sales Price $234,400 84,400 Cost $204,400 152,400 Accumulated Depreciation $56,400 27,400 Lily's taxable income before these transactions is $194,900. 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 answers to the nearest whole dollar amount.) Description Taxable income Tax liability Amount $ 240,700

Answer 1

Calculation of tax liability
There are 2 components involved here : 1. Ordinary Income 2. Capital gains Income
Calculation of tax liability on Ordinary Income
Ordinary Income = $194,900
Tax Slab	Rate	Taxable Amount	Tax liability
0 to 9700	10%	9,700	970
9701 to 39475	12%	29,775	3,573
39476 to 84200	22%	44,725	9,840
84201 to 160725	24%	78,325	18,798
160726 to 194900	32%	34,175	10,936
Total tax liability on Ordinary Income :			44,117
Calculation of tax liability on Capital Gains
Capital Gains Income = $45,800
Capital Gains Tax rate for 2019 = 15%
Capital Gains tax = 45,800*15% = 6,870 $
HENCE, TOTAL TAX LIABILITY = 44,117+6,870 = 50,987$

Note/Assumptions :

1. Since it is not mentioned in the questions as to which year's tax rates/slabs are to be used, we have used the 2019 federal income tax rates for the calculation of tax liability. We have also mentioned the rates used below :

2019 federal income tax brackets

Tax rate	Single
10%	$0 to $9,700
12%	$9,701 to $39,475
22%	$39,476 to $84,200
24%	$84,201 to $160,725
32%	$160,726 to $204,100
35%	$204,101 to $510,300
37%	$510,301 or more

2. In absence of any information, we have assumed this gain to be long-term capital gain i.e., asset is sold after 1 year and hence applied the tax rate of 15%. Had these been short term capital gains, normal tax rates would have been applied.