You own some equipment which you purchased three years ago at a cost of $135,000.The equipment is 5-year property for MACRS.You are considering selling the equipment today for $82,500.Which one of the following statements is correct if your tax rate is 34%?

Question

Quizplus · Accepted Answer

The book value of the equipment today can be calculated using MACRS depreciation method as follows:
Year 1: (135,000 x 0.2) = 27,000
Year 2: (135,000 x 0.32) = 43,200
Year 3: (135,000 x 0.192) = 25,920
Book value today = Cost - accumulated depreciation
= $135,000 - ($27,000 + $43,200 + $25,920)
= $38,880
Since the selling price is lower than the book value, there will be a loss on the sale. The tax deduction for the loss on the sale is the difference between the selling price and the book value, which is $82,500 - $38,880 = $43,620. This loss will reduce the taxable income, and hence the tax liability.
Tax due on the sale = (selling price - book value) x tax rate
= ($82,500 - $38,880) x 0.34
= $14,830.80
Therefore, option C is correct.

You Own Some Equipment Which You Purchased Three Years Ago