AJ started a small business a year ago (i.e., this is the SECOND year of operations). He purchased the following assets to use in the business: Cost (1/1/x1) Estimated Selling Price (12/31/x2) Machinery $1,500,000 $1,650,000 Land $55,000 $62,000 Warehouse $120,000 $127,000 In addition to the above assets that are used in the business, AJ purchased 1,000 shares of stock to be held as an investment for the business. He paid $15,000 for the stock. The estimated market value of the stock as of 12/31/x2 is $10,000. AJ always elects to maximize deductions whenever possible. The estimated operating income from the business in x2 is $85,000. AJ's tax rate on ordinary income is 37% and all capital gains are taxed at 15%. AJ has decided to begin a new career and, therefore, intends to sell all of the assets in his business (on 12/31/x2).

Answer ALL SIX of the following questions. You may use tax year 2022 limits/deduction amounts where needed. You may IGNORE BONUS DEPRECIATION for the entirety of the case, but do NOT ignore Section 179 (hint).

1. What are AJ's CURRENT YEAR (YEAR 2) cost recovery deductions?

Machinery: $___________________ Warehouse: $___________________ Land: $_______________________ Stock: $____________________

2. What is the ADJUSTED BASIS of each asset as of 12/31/x2 (just before the asset is sold)? SHOW YOUR WORK Machinery:$_____________ Warehouse:$_________________ Land:$__________________ Stock:$__________________

3. What is AJ's GAIN OR LOSS FROM SELLING EACH ASSET? All I want here is the REALIZED GAIN OR LOSS NUMBER FOR EACH ASSET...NOTHING ELSE. SHOW YOUR WORK OR YOU WILL NOT BE GIVEN CREDIT, EVEN IF YOU HAVE THE CORRECT ANSWER. Machinery:$__________________ Warehouse:$________________ Land:$___________________________ Stock:$_____________________

4. How much depreciation recapture will AJ be subject to for each asset? SHOW YOUR WORK You must circle (or highlight/bold) which depreciation recapture rule applies. Machinery:$________________ Warehouse:$ Land:$ _______________________ Stock:$ _______________________

5. What is AJ'S CHANGE IN TAXABLE INCOME FROM SELLING THE BUSINESS ASSETS? Show your work Business Investment LT ST Summary

Machinery 1245 1250 291 NONE Warehouse 1245 1250 291 NONE Land 1245 1250 291 NONE

Stock

1245 1250 291 NONE Change in Taxable Income =

6. What is AJ'S AFTER-TAX CASH FLOW FROM SELLING THE BUSINESS ASSETS? SHOW YOUR WORK

BEFORE-TAX CASH FLOW TAX ON ORDINARY INCOME TAX ON CAPITAL GAINS/LOSS AFTER-TAX CASH FLOW