During the current year, Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000). The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed. ADS depreciation would have been $300,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

Question

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When calculating E&P, we start with taxable income and make certain adjustments. One of those adjustments is to add back any depreciation claimed beyond what would have been allowed under ADS (which is a slower method of depreciation). In this case, if the equipment had been depreciated under ADS, the total depreciation claimed would have been $360,000 ($760,000 cost - $400,000 MACRS already claimed), leaving $400,000 of ADS depreciation remaining. However, the equipment was sold before the end of its useful life, so some of that remaining ADS depreciation cannot be claimed. The amount of ADS depreciation that is "recaptured" as a result of the sale is the excess of MACRS previously claimed over the ADS that would have been allowed, which in this case is $100,000 ($400,000 ADS - $300,000 MACRS). Therefore, we subtract $100,000 from taxable income to arrive at the E&P adjustment.

During the Current Year, Hawk Corporation Sold Equipment for $600,000