Question

Tax calculations For each of the following cases, describe the various taxable components of the funds received through sale of the asset, and determine the total taxes resulting from the transaction. Assume 40% ordinary and capital gains tax rates. The asset was purchased 2 years ago for $200,000 and is being depreciated under MACRS using a 5-year recovery period. (See Table 3.2 on page 100 for the applicable depreciation percentages.)

a. The asset is sold for $220,000.

b. The asset is sold for $150,000.

c. The asset is sold for $96,000.

d. The asset is sold for $80,000.

TABLE 3.2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year

Recovery year 3 years 5 years 7 years 10 years

1 33% 20% 14% 10%

2 45 32 25 18

3 15 19 18 14

4 7 12 12 12

5_ 12 9 9

6_ 5 9 8

7 __ _9 7

8 _ _4 6

9 _ _ _6

10 _ _ _6

11 ___ ___ ___ 4

Totals 100% 100% 100% 100%

Answer 1

Calculation of Tax benefit or Tax Loss
Situation	Sale Value	Book value	Gain or (Loss) on sale	Tax @ 40% of Gain or (loss)		After tax Sale value
a	$220,000.00	$96,000.00	$124,000.00	$49,600.00	Tax Loss	$170,400.00
b	$150,000.00	$96,000.00	$54,000.00	$21,600.00	Tax Loss	$128,400.00
c	$96,000.00	$96,000.00	$0.00	$0.00	No Tax loss or benefit	$96,000.00
d	$80,000.00	$96,000.00	-$16,000.00	$6,400.00	Tax benefit	$86,400.00
Working
Calculation of book value of asset at the end of 2nd Year using MACRS using a 5-year recovery period depreciation rates.
Cost of an asset	$200,000.00
Less : Depreciation for 1st Year [20% of Cost]	$40,000.00
Less : Depreciation for 2nd Year [32% of Cost]	$64,000.00
Book value of an asset at the end of 2nd Year	$96,000.00