A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.
A) $0 tax liability
B) $1,100 tax liability
C) $3,600 tax liability
D) $280 tax benefit

Question

Quizplus · Accepted Answer

The asset's book value after four years of MACRS depreciation is less than $1,000, resulting in a loss. The tax benefit is 40% of the loss, which is $280.

A Corporation Is Selling an Existing Asset for $1,000