Question

"A firm purchases a new machine for $179,000. It borrows $71,600 at 3.4% annual interest to be repaid in 2 years. The machine is depreciated using a 5-year MACRS. At the end of 3 years, the firm sells the machine for $55,000. The firm's tax rate is 33%. How much does the firm pay or save in taxes from selling this machine at the end of 3 years? In other words, what is the gains tax?
If the firm will have to pay taxes from selling this machine, enter your answer as a positive number. If the firm will save money in taxes from selling the machine, enter the answer as a negative number. "

Answer 1

The 5 year-MACRS depreciation rates are 20%, 32% and 19.2% for three years and a half year convention. With an initial cost of $179,000 the depreciation amounts are $35,800, $57,280 and $17,184. With subtracting the depreciation the book value at the time of sale is $179,000 – ($35,800 + $57,280 + $17,184) = $68,736. Now the selling price is $55,000 so there is a capital loss.

The tax on this loss that is saved is therefore, 33%*($55,000 – $68,736)

= -4,532.88