Tax depreciation shelters a portion of annual operating income from taxation. However, the amount of cumulative...

Tax depreciation shelters a portion of annual operating income from taxation. However, the amount of cumulative tax depreciation is taxed when the property is sold. Suppose that your taxes due on sale will be $35,000 greater than if the property had not been depreciated. If the sale were to occur five years from now, determine the present value of the tax on depreciation recapture in the year of sale assuming a discount rate of 9.5%.
A) $31,963
B) $22,233
C) $55,098
D) $134,390

Given the following information, calculate the straight-line depreciation rate for the second year: cost recovery period: 27½ years, date of purchase: June 12th.
A) 1.67%
B) 3.63%
C) 1.97%
D) 20.0%

Suppose that you are able to generate an annual depreciation deduction of $20,000 that would otherwise have been taxed at a 30% rate each year for seven years. Suppose that your taxes due on sale in year 7 will be $32,000 greater than if the property had not been depreciated. Determine the net benefit of depreciation assuming a discount rate of 6.5%.
A) $53,499
B) $32,907
C) $20,592
D) $12,315

Expert Solution

1.PV of tax on depreciation recapture in the year of sale (year 5)=PVIFA(9.5%,5years)*$35,000=3.839709*$35000=$134,390.

YEAR	PV of [email protected]% Annual discounting

1	0.913242009
2	0.834010967
3	0.761653851
4	0.695574293
5	0.635227665
	3.839708787

2. Yearly straight line depreciation from year 2 onwards=100%/cost recovery period=100%/27.5=3.63%

3. PV of tax savings on depreciation of 20,000 per 7 year is given :-

Year	yearly depreciation	Tax Savings @30%	PV of [email protected]% discounting	PV of tax savings
1	20,000	$ 6,000.00	0.938967136	$ 5,633.80
2	20,000	$ 6,000.00	0.881659283	$ 5,289.96
3	20,000	$ 6,000.00	0.827849092	$ 4,967.09
4	20,000	$ 6,000.00	0.777323091	$ 4,663.94
5	20,000	$ 6,000.00	0.729880837	$ 4,379.29
6	20,000	$ 6,000.00	0.685334119	$ 4,112.00
7	20,000	$ 6,000.00	0.643506215	$ 3,861.04
				$ 32,907.12

PV of additional tax due on sale ,$32,000 in 7th year=$32000*PVIF(6.5%,5)=$32,000*0.643506215=$20,592.20

Net benefit of depreciation=$32,907.12-$20,592.20=$12,315.

jeff jeffy answered 1 year ago

The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes.

Depreciation as a Tax ShieldThe term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Supreme Company is considering the purchase of an asset as of January 1, 2017. The cost of the asset with a five-year life and zero residual value is $83,300. The company will use the straight-line method of depreciation.Supreme's income for tax purposes before recording depreciation on the asset will be $53,100 per year for the...

Taxation table Income Tax Standard personal income tax rates Income band Taxable amount Rate K1 to...

Taxation table Income Tax Standard personal income tax rates Income band Taxable amount Rate K1 to K39,600 first K39,600 0% K39,601 to 49,200 next K9,600 25% K49,201 to K74,400 next K25,200 30% Over K74,400 37.5% Income from farming for individuals K1 to K39,600 first K39,600 0% Over K39,600 10% Company Income Tax rates On income from manufacturing and other 35% On income from farming 10% Capital Allowances Implements, plant and machinery and commercial vehicles: Wear and Tear Allowance – Standard...

Show the lower portion of the 2021 income statement that reports the income tax benefit of the net operating loss.

Wynn Farms reported a net operating loss of $132,000 for financial reporting and tax purposes in 2021. The enacted tax rate is 25%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows: Taxable Income Tax Rates Income Taxes Paid 2017 $ 68,000 25 % $ 17,000 2018 78,000 25 19,500 2019 112,000 25 28,000 2020 68,000 40 27,200 Prepare the journal entry to recognize the income tax benefit of the net...

Net Operating Income: $14,000 Depreciation: $4,000 Debt Service: $13,000 (interest is $12,000 of this amount) Vacancy...

Net Operating Income: $14,000 Depreciation: $4,000 Debt Service: $13,000 (interest is $12,000 of this amount) Vacancy and Credit Loss: $7,000 Interest Expense: $12,000 Operating Expenses: $3,000 Tax rate: 28% Assuming that the investor can use any tax shelter benefits, what are the taxes due or the taxes saved ($$$) for these annual figures? ($1,440), $560 , ($560), $1,440? Assuming that the investor can use any tax shelter benefits, what is the cash flow after taxes? ($2,000), $1,000, ($1,440), $1,560

Is taxation theft? Why or why not? Research the Progressive income tax, the flat tax and...

Is taxation theft? Why or why not? Research the Progressive income tax, the flat tax and the fair tax. Which one do you prefer and why? Make sure you justify your answer

Discuss the numerous ways our government includes income in taxation and excludes income from taxation.

Each type of business entity is affected by taxation. However, tax rates vary among the many...

Each type of business entity is affected by taxation. However, tax rates vary among the many different types of company structures, such as traditional C corporations, S Corporations, partnerships, and LLC. For example, corporations are generally taxed at higher tax rates than sole proprietors. Respond to the following in a minimum of 175 words and citations If you were going into business and had a choice of business structures to select from that would minimize your taxes, while yielding the...

Alberto Company determines its annual income tax expense to be $459,000. Of that amount, $300,000 has...

Alberto Company determines its annual income tax expense to be $459,000. Of that amount, $300,000 has already been paid during the year (on a quarterly basis) and charged to the Income Taxes Expense account. The company has determined that, of the amount that has not yet been paid or recorded, $75,000 will be deferred into future years under certain favorable income tax provisions available to the company. Prepare the end-of-year general journal entry to recognize income taxes accrued. (If no...

Compute taxable income, tax and amount either due to IRS or to be refunded from the...

Compute taxable income, tax and amount either due to IRS or to be refunded from the IRS for 2019 tax return for Doug and Edith, a married couple. Doug, age 42 and Edith, age 39, residents of The Bronx. They have three children, Frank, age 11, Gary, age 8 and Helen, age 3. W-2 Information Salary Withheld federal tax Withheld state/city tax Doug 57,240 6,030 2,150 Edith 53,970 5,825 1,900 Edith was in an accident in Feb. of 2019. Because of computer problems the hospital insisted on Doug...

Assume that income from continuing operations (net of tax) is $50,000, what is the amount of...

Assume that income from continuing operations (net of tax) is $50,000, what is the amount of EPS reported for discontinued operations? Using the information below, determine the number indicated above to be reported on the income statement, the statement of comprehensive income, or the retained earnings statement for the year ended Dec. 31, 2020 Assume a 30% tax rate on all items and that 100,000 shares of common stock were outstanding during the year. All amounts except for the beginning...

Question