Question

During the current year, Blue Corporation sold equipment for $210,000. The equipment had an adjusted basis of $140,000 at the sale date and was purchased a few years ago for $240,000. MACRS deductions claimed on the equipment during the period of time Blue owned it amounted to $100,000. ADS depreciation on the equipment was $55,000. As a result of the sale, which adjustment to taxable income is needed to determine E & P?

a. No adjustment is required.

b. Add $45,000 to taxable income.

c. Subtract $45,000 from taxable income.

d. Add $75,000 to taxable income.

e. None of the above

Answer 1

Solution:

The Answer is C). Subtract $45,000 from taxable income.

Explanation:

1) For normal income tax purposes, the gain to be added to taxable income is differences between Sale Value- Adjusted Basis = $210000-$140000 = $70000

For E & P purposes, adjustment to taxable income is nothing but differences between ADS [Alternative Depreciation System] and MACRS Depreciation.

2) Adjustment to taxable income = $ 55,000 - $100,000 = - $ 45,000.

3) So, Subtract $45,000 from taxable income.