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 modification, 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 modification should be ($50,000) because the state regular-tax basis in the asset was $350,000, which is $50,000 more than the Federal tax basis of $300,000. This difference reduces the gain recognized for state tax purposes compared to federal tax purposes.

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