On January 2,2008,Green Corporation purchased equipment with an ADS recovery period of 10 years and a MACRS useful life of 7 years.The cost of the equipment was $150,000.Section 179 was not elected.MACRS depreciation properly claimed on the asset,including depreciation in the year of sale,totaled $39,802.50.The assets were sold on July 1,2009,for $145,000.To arrive at current E & P in 2009,how should taxable income be adjusted for the sale?

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Gain on sale of the equipment for purposes of determining taxable income is $34,802.50,computed as follows: $145,000 (selling price)- $110,197.50 (adjusted basis).The adjusted basis is determined by subtracting the MACRS depreciation ($39,802.50)from the cost of $150,000.For purposes of computing E & P,the gain is $10,000 [$145,000 (selling price)- $135,000 (E & P adjusted basis)].For E & P purposes,depreciation is computed using the straight-line method over 10 years,with the half-year convention.Thus,the corporation deducts $15,000 annually for depreciation ($150,000 ÷ 10 years).In the years of purchase and sale,the company deducts 1/2 year of depreciation,or $7,500 per year.Therefore,total E & P depreciation is $15,000 and the adjusted basis for E & P purposes is $135,000 [$150,000 (cost)- $15,000 (depreciation)].The adjustment to taxable income to account for the difference in gain for tax and E & P purposes is a decrease in taxable income of $24,802.50 [$10,000 (E & P gain)- $34,802.50 (taxable gain)].

On January 2,2008,Green Corporation Purchased Equipment with an ADS Recovery