Question

Why does a salvage value resulting in a net loss turn into a tax credit

Answer 1

when an asset is sold at a price below its book value, the company incurs a capital loss, This loss can either be adjusted to other incomes or can be carry forward for adjustment in next year depending upon the tax regulations of the reigion. When it is adjested it reduces the net taxable income and thereby net tax laibility. For example

Assume tax rate = 30% The company has total income of $ 500,000 So its tax liability = 30%*500,000 = $150,000

Now if the company has sold an assets for $50,000 whose book value is $ 150,000 it incurred a loss of $ 100,000.

So its earnings will be = $ 500,000 - 100,000 = $ 400,000 and its tax liability = 400,000 * 30% = 120,000

SO it has been able to save tax = $ 30,000 which can also be calculated as

= (150,000 - 50,000) * 30 % = $ 30,000

Thus  a salvage value that results in a net loss will turn into a tax credit