On April 2012, Mr. Hasan Mehmed purchased his business and paid $1,300,000. The cost includes a building $1,000,000, land $200,000, and a machine $100,000. These were the only properties Mr. Mehmed purchased in 2012 and he maximized deductions in his business. On August 2014, he sold his business for $1,400,000 allocating $1,050,000 to the building, $230,000 to the land, and $120,000 to the machine. How much gains or losses would he recognize on the sale and what would be appropriate tax rates on gains/losses. Mr. Mehmed had no other property sale on 2014, and his ordinary tax rate was 39.6% for 2014.
1. What are the issues on each property sale, and what are the most effective research key words looking for the relevant primary tax law authorities (you may need to read your findings and repeat the process to find out relevant tax laws and effective key words).
2. What are the relevant Internal Revenue Code(s) on each property sale? Specify the authorities if applicable. (e.g. Section 1001(b)(2), not Section 1001)
3. Applying tax laws above, compute recognized gains or losses on each property and indicate any recaptured or unrecaptured depreciation.
4. Identify the amount and character (ordinary, capital, §1231, etc.) of each gain or loss, and find the appropriate tax rates on each gains or losses. Specify the internal revenue codes you find the tax rate(s).
5. What is the total taxes Mr. Mehmed would have paid for his business sale on 2014, and what would be the After-Tax Cash Flow for the business sale transaction in 2014?