Let's break down and solve each part step-by-step: --- ### **1. Section 1245 Depreciation Recapture on Sale of Office Equipment** #### **Details:** - Sold for: **$6,180** - Purchased: **$7,725** (on 04/01/2021) - Depreciated over 7 years, MACRS half-year convention - Sold on: **10/30/2024** #### **a. Calculate MACRS Depreciation (Table 6A-1, 7-year property, half-year convention):** **Year 1 (2021):** 14.29% **Year 2 (2022):** 24.49% **Year 3 (2023):** 17.49% **Year 4 (2024, disposed in 4th year):** 12.49% × 0.5 = 6.245% (half-year in year of sale) Let’s compute the depreciation for each year: - **2021:** $7,725 × 14.29% = **$1,103.60** - **2022:** $7,725 × 24.49% = **$1,891.85** - **2023:** $7,725 × 17.49% = **$1,351.55** - **2024:** $7,725 × 6.245% = **$482.27** **Total Depreciation Taken:** $1,103.60 + $1,891.85 + $1,351.55 + $482.27 = **$4,829.27** **Adjusted Basis at Sale:** $7,725 (original cost) - $4,829.27 (depreciation) = **$2,895.73** #### **b. Section 1245 Recapture:** - **Amount realized:** $6,180 - **Adjusted basis:** $2,895.73 - **Depreciation taken:** $4,829.27 **Gain on sale:** $6,180 - $2,895.73 = **$3,284.27** **Section 1245 Recapture:** All gain up to depreciation is recaptured as ordinary income. - **Since gain ($3,284.27) < depreciation ($4,829.27),** all the gain is recapture. - **Section 1245 Recapture = $3,284.27 (all ordinary income)** --- ### **2. Self-Employment Deduction on Zofia’s Business Income** - **Schedule C net income:** $64,000 #### **a. Calculate SE Tax:** - **SE tax rate:** 15.3% - **SE income:** 92.35% of $64,000 = **$59,104** - **SE tax:** $59,104 × 15.3% = **$9,044.91** - **Deduction for AGI:** 50% of SE tax = **$4,522.46** --- ### **3. Qualified Business Income (QBI) for Form 8995** - **QBI = Net business income (Schedule C) less SE tax deduction and Section 1245 gain (if ordinary income from business asset sale):** - **Net business income:** $64,000 - **Section 1245 gain:** $3,284.27 (should also be included in QBI as ordinary income from business asset) - **QBI before SE deduction:** $64,000 + $3,284.27 = **$67,284.27** *Note: QBI is *not* reduced by the SE tax deduction directly; the deduction is at the AGI level, not from QBI.* --- ### **4. Qualified Business Income Deduction (QBID) for Form 8995** - **QBI deduction = 20% × QBI** - **QBI = $67,284.27** - **QBID = $67,284.27 × 20% = $13,456.85** --- ### **5. What amount(s) will be entered on Line 13 of Form 1040 (Qualified Business Income Deduction)?** - **Line 13 of Form 1040:** Qualified Business Income Deduction - **Amount:** **$13,456.85** --- ### **6. What amount(s) will be entered on Line 8 of Form 1040 (Other Income)?** - **Section 1245 gain ($3,284.27) is reported on Form 4797, but on the 1040, it flows to Schedule 1, Line 4 (Other gains), then to 1040 Line 8.** - **Amount on Line 8:** **$3,284.27** --- ### **7. What amount(s) will be entered on Line 10 of Form 1040 (Adjustments to Income)?** - **Line 10: Adjustments to income (including SE tax deduction)** - **SE tax deduction:** **$4,522.46** --- ## **Summary Table** | Item | Amount | |------|--------| | **Section 1245 Recapture (ordinary income)** | $3,284.27 | | **Self-Employment Deduction** | $4,522.46 | | **QBI for Form 8995** | $67,284.27 | | **QBID for Form 8995 (20%)** | $13,456.85 | | **Form 1040 Line 13 (QBID)** | $13,456.85 | | **Form 1040 Line 8 (Other income)** | $3,284.27 | | **Form 1040 Line 10 (Adjustments to income)** | $4,522.46 | --- ### **Final Answers (Step-by-Step):** **1. Section 1245 depreciation recapture:** **$3,284.27** (ordinary income, all recaptured under Section 1245) **2. Self-employment deduction:** **$4,522.46** **3. Zofia’s Qualified Business Income (QBI) for Form 8995:** **$67,284.27** **4. Qualified Business Income Deduction (QBID) for Form 8995:** **$13,456.85** **5. Amount on Line 13 of Form 1040:** **$13,456.85** **6. Amount on Line 8 of Form 1040:** **$3,284.27** **7. Amount on Line 10 of Form 1040:** **$4,522.46** --- **Let me know if you want to see how these flow through the various tax forms!**