Question

Equipment associated with manufacturing small railcars had a first cost of $170,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $632,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 29%, what would be the difference in taxes paid in year 2 if the depreciation method were straight line instead of Modified Accelerated Cost Recovery System (MACRS)? The MACRS depreciation rate for year 2 is 32%.

The difference in taxes paid is determined to be $

Answer 1

		Year 2
	Revenue	$        632,000
Less:	Operating expenses	98,000
Less:	Depreciation - SL	28,000	=(170000-30000)/5
	Income before taxes	506,000
	Taxes at 29%	$        146,740
		Year 2
	Revenue	$        632,000
Less:	Operating expenses	98,000
Less:	Depreciation - MACRS-32%	54,400	=170000*0.32
	Income before taxes	479,600
	Taxes at 29%	$        139,084
	Difference in taxes	$            7,656
	(146740-139084)