A. Cara sells a piece of construction equipment used in
a. Cara sells a piece of construction equipment used in her excavation business (a sole proprietorship) in 2020. The equipment had an initial cost of $86,000 in 2018, and she has taken $70,000 in cost recovery via depreciation on the equipment. Cara sells the equipment for $96,000. What is the AMOUNT and CHARACTER of Cara’s gain or loss for 2020 assuming no 1231 losses were deducted in the past five years? (5 points)
b. Refer to part a. Cara had the following net Section 1231 results for each of the years shown. What amount of Cara’s gain(s), from part a, will be taxable as a capital gain in 2020? (5 points)
Tax Year Net 1231 Loss Net 1231 Gain
2015 $18,000
2016 $33,000
2017 $12,000
2018 $41,000
2019 $20,000
c. In addition to the gain on the construction equipment in parts a and b, Cara has the following capital gains and losses: A $3,000 STCG, a $4,000 LTCG, a $12,000 STCL, and a Collectibles gain of $15,000. Including any gain on the construction equipment taxable as a capital gain from part b, what net capital gain(s) or loss(es) does Cara report on her 2020 tax return? Be as specific as possible. (5 points)
Explain how depreciation recapture under IRC 1245 and 1250 can be described as an equitable, or “fair,” treatment to taxpayers. (HINT: Think about marginal tax rates) (5 points)
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