ExpertMedium1 markMultiple Choice
CPA · Question 65 · Area 4: Entity Tax Planning
A taxpayer sells a business asset (Section 1231 asset) for a gain of $50,000. In the previous 5 years, they had $20,000 of Section 1231 losses that were deducted as ordinary losses. How is the $50,000 gain taxed?
A taxpayer sells a business asset (Section 1231 asset) for a gain of $50,000. In the previous 5 years, they had $20,000 of Section 1231 losses that were deducted as ordinary losses. How is the $50,000 gain taxed?
Answer options:
A.
$50,000 Capital Gain.
B.
$50,000 Ordinary Income.
C.
$20,000 Ordinary Income; $30,000 Capital Gain.
D.
$30,000 Ordinary Income; $20,000 Capital Gain.
How to approach this question
1. Identify Gain: $50,000 Section 1231 Gain.<br/>2. Check Lookback Rule: Have 1231 losses been deducted in last 5 years?<br/>3. Fact: $20,000 of non-recaptured 1231 losses.<br/>4. Rule: Current year 1231 gain is ordinary income to the extent of non-recaptured 1231 losses.<br/>5. Result: $20,000 Ordinary; $30,000 Capital (LTCG).
Full Answer
C.$20,000 Ordinary Income; $30,000 Capital Gain.✓ Correct
The Section 1231 lookback rule requires that net Section 1231 gains be treated as ordinary income to the extent of non-recaptured Section 1231 losses from the five preceding taxable years.
Common mistakes
Forgetting the 5-year lookback rule.
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