Question

Shimmer Inc. is a calendar-year-end, accrual- method corporation. This year, it sells the following long-term assets: Asset Building Sparkle Corporation stock Sales Price Cost $747,000 $691,000 139,000 248,000 Accumulated Depreciation $ 42,000 n/a Shimmer does not sell any other assets during the year, and its taxable income before these transactions is $897,000. What are Shimmer's taxable income and tax liability for the year? (Assume a Corporate income tax rate as 21%.) Answer is complete but not entirely correct. $ 886,000 Taxable income Tax liability $ 886,000

Answer 1

Step 1: Calculation from profit on sale of Building

Cost of Building - $6,91,000

Accumulated Depreciation- $42,000

WDV of the Building = $6,91,000- $42,000= $6,49,000

Profit on sale of Building = Sale Price of Building - WDV of Building

=$747000 - $ 649000

= $ 98,000

Section 291 Recapture 20% of accumulated Depreciation =42,000*20%= $ 8,400 (Ordinary Gain)

Section 1231 Gain = Profit on sale of Building- Section 291 Recapture= $98,000- $8,400 = $89,600 (1231 Gain)

Step 2: Calculation of Profit/Loss on Sale of Stock

Cost Price of Sparkle corporation Stock = $2,48,000

Sell Price of Sparkle corporation Stock = $1,39,000

Loss on sale of stock = $248000 - $ 1,39,000

= ($1,09,000)

Section 1231 gain will be offset against the loss on sale of stock and the rest loss can be carry back up to 3 years or carry forward up to 5 years.

Step 3 Calculation of Total Taxable income and Tax Liability

Particulars	Amount
Taxable Income before these Transactions	$8,97,000
Add Ordinary Income from sale	$8,400
Taxable Income ( Main Answer)	$9,05,400
Tax Liability $9,05,400 × 21% ( Main Answer)	$1,90,134