During its current tax year (year one), a pharmaceutical company purchased a mix

Question

During its current tax year (year one), a pharmaceutical company purchased a mixing tank that had a fair market price of $116000. It replaced an older, smaller mixing tank that had a BV of $15000. Because a special promotion was underway, the old tank was used as a trade-in for the new one, and the cash price (including delivery and installation) was set at $93000. The MACRS class life for the new mixing tank is 9.5 years. a. Under the GDS, what is the depreciation deduction in year two? The depreciation deduction in year two is $ . (Round to the nearest dollar.)

Explanation / Answer

Step 1: Calculate Cost Basis

The cost basis of tank is calculated as below:

Cost Basis of Tank = Cash Price + Book Value = 93,000 + 15,000 = $108,000

____

Step 2: Determine the Depreciation Deduction in Year 2

As per the applicable rules, for a mixing tank having a life of 9.5 years, the applicable GDS period will be 5 years. With the use of MACRS table for 5 year property, we can identify the tax rate for second year as 32%. The depreciation deduction in year two would be calculated as below:

Depreciation Deduction = Cost Basis*MACRS Rate for Year 2 = 108,000*32% = $34,560

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