On January 2, 2016, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years. Section 179 was not elected. MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605. The equipment was sold on July 1, 2017, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

Question

Quizplus · Accepted Answer

Since Orange Corporation used MACRS depreciation and did not elect Section 179, the equipment was subject to recapture. This means that any gain on the sale of the equipment must be recaptured as ordinary income, up to the amount of depreciation previously claimed.

In this case, the equipment was sold for $290,000, resulting in a gain of $-10,000 ($290,000 - $300,000). Since the total MACRS depreciation claimed on the equipment was $79,605, Orange Corporation must recapture up to that amount as ordinary income.

Therefore, the adjustment to taxable income needed to arrive at current E&P is a decrease of $49,605 ($79,605 - $30,000), which is the amount of depreciation in excess of the gain. Hence, the correct answer is B.

On January 2, 2016, Orange Corporation Purchased Equipment for $300,000