Calculation Of Gains Tax Examples

Q1. A company purchased a car fixing machine costing $230,000 in year 0. This machine is classified as seven year recovery property. And it is sold at the end of three years after its purchase for $150,000. Assume that tax rate is 34%.

Answer
A cost basis: $230,000
Project year: 3 years
MACRS: 7-year property class
Salvage value: $150,000 at the end of Year 3

1. Total Depreciation = 230,000*0.1429+230,000*0.2449+230,000*0.1749/2=$109,308 by MACRS depreciation schedules
3. Book Value = Cost basis- Total Depreciation =230,000 -109,308 = $120,693
4. Gains = Salvage Value - Book Value = $150,000 - $120,693 = $29,308
5. Gains Tax (34%) = 0.34 * $29,308 = $9,965

Q2. A printing machine is purchased for $1000 by some company and has a useful life of 10 years. At the end of 3 years, the company decided to sell the machine for $500. Assume that tax rate is 50%. what is the book value of the machine at the end of 3years and gains(losses) taxs?

Answer
A cost basis: $1000
Project year: 3 years
MACRS: 10-year property class
Salvage value: $500 at the end of Year 3

1. Total Depreciation = 1000*0.1+1000*0.18+1000*0.1440/2=$352 by MACRS depreciation schedules
2. Book value= Cost basis-Total depreciation = 1000-352=$648
3. Gains=Salvage Value - Book Value = $500-$648= -148 <- negative number
This is not gains, but losses. Then we can calculate the losses tax.
4. Gains tax(50%)= 0.5*$148=$74BUT!! This is not gain tax!

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