Question

Hans runs a sole proprietorship. Hans has reported the following net §1231 gains and losses since he began business. The net §1231 gains shown are before the look-back rule. What is the question?

Answer 1

Net §1231 gains and losses in a sole proprietorship are subject to ordinary income tax rates. The look-back rule may apply to recharacterize gains as ordinary income.

Step-by-step explanation:

Hans runs a sole proprietorship and has been reporting net §1231 gains and losses. Net §1231 gains are gains from the sale or exchange of property used in a trade or business. These gains are treated as ordinary income and are subject to ordinary income tax rates. On the other hand, net §1231 losses are losses from the sale or exchange of property used in a trade or business. These losses are treated as ordinary losses and can be used to offset other ordinary income. The look-back rule is a provision that requires the recharacterization of gains from the sale or exchange of property used in a trade or business if the property had been held for less than one year. This means that the gains would be treated as ordinary income and subject to ordinary income tax rates instead of the more favorable capital gains tax rates.