Maritech purchased a pellet mill 4 years ago for $60,000. The mill is being depreciated over 7 years using MACRS. Maritech is planning to replace the mill with a higher volume unit that will cost $110,000 installed. If the old mill can be sold for $25,000, what is the tax liability? Assume a marginal tax rate of 40%. Use the rounded MACRS schedule listed below.
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Question

Maritech purchased a pellet mill 4 years ago for $60,000. The mill is being depreciated over 7 years using MACRS. Maritech is planning to replace the mill with a higher volume unit that will cost $110,000 installed. If the old mill can be sold for $25,000, what is the tax liability? Assume a marginal tax rate of 40%. Use the rounded MACRS schedule listed below. 
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Quizplus · Accepted Answer

The tax liability is calculated by first determining the book value of the old mill and then calculating the gain or loss on the sale. The MACRS percentages for the first four years are 14%, 25%, 18%, and 12%, respectively. The total depreciation is calculated as follows: $60,000 * (14% + 25% + 18% + 12%) = $60,000 * 69% = $41,400. The book value of the mill is then $60,000 - $41,400 = $18,600. Selling the mill for $25,000 results in a gain of $25,000 - $18,600 = $6,400. The tax liability on this gain, given a 40% tax rate, is $6,400 * 40% = $2,560.

Maritech Purchased a Pellet Mill 4 Years Ago for $60,000