An asset was purchased three years ago for $215,000. It falls into the five-year

Question

An asset was purchased three years ago for $215,000. It falls into the five-year category for MACRS depreciation. The firm is in a 40 percent tax bracket. Use Table 12–12.

Compute the gain and related tax on the sale if the asset is sold now for $75,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)

Compute the gain and related tax on the sale if the asset is sold now for $75,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)

Explanation / Answer

1. Computation of Capital gain:

Here tha basis i.e, original cost of the asset = $215,000

Adjusted basis = original cost - Depreciation = $215,000 - {215,000 * (0.200 + 0.320 + 0.192)}

=  $215,000 - 153,080 = 61,920 is the adjusted basis of the Asset.

Capital gain = Sale price - Adjusted basis

= $75,060 - 61,920 = $13,140.

This gain of $13,140 is also called as depreciation recapture.

2. Tax obligation = $13,140 * 40% = $5,256 taxed as ordinary income.

Note: When any asset sold under depreciation recapture, then the gain will be generally taxed as ordinary income.

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