During the current year,Gander Corporation sold equipment for $250,000 (adjusted basis of $130,000).The equipment was purchased a few years ago for $280,000 and $150,000 in MACRS deductions have been claimed.ADS depreciation would have been $100,000.As a result of the sale,the adjustment to taxable income needed to determine E & P is:

Question

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The adjusted basis of the equipment sold is $130,000, which is less than the original cost of the equipment of $280,000 minus $150,000 in MACRS deductions, or $130,000. This means that some of the tax deductions claimed in prior years were based on a higher cost than the actual adjusted basis used to calculate the gain on sale. Therefore, an adjustment is needed to account for the difference in taxable income and E&P. Since the adjusted basis is lower than the tax basis, a subtracting adjustment is needed to account for the excess tax deductions taken in prior years. The adjustment amount is equal to the difference between the tax basis (which is the original cost of $280,000 minus the ADS depreciation of $100,000) and the adjusted basis of $130,000, which is $50,000. Therefore, the correct answer is C) Subtract $50,000.

During the Current Year,Gander Corporation Sold Equipment for $250,000 (Adjusted