Zhao Company sold an asset on the first day of the tax year for $500,000. Zhao's Federal tax basis for the asset was $300,000. Because of differences in cost recovery schedules, the state regular-tax basis in the asset was $350,000. What adjustment, if any, should be made to Zhao's Federal taxable income in determining the correct taxable income for the typical state?

Question

Quizplus · Accepted Answer

The adjustment that needs to be made is the difference between the state regular-tax basis ($350,000) and the Federal tax basis ($300,000), which is $50,000. Therefore, Zhao's Federal taxable income should be reduced by $50,000 to determine the correct taxable income for the state. Hence, the correct answer is option B.

Zhao Company Sold an Asset on the First Day of the Tax