Question

A company is thinking to sell an asset since it will be replaced by a higher capacity one. The estimated sale price of the asset is $300,000 while the asset has depreciated to the salvage value of $500,000. If the company has the marginal tax rate of 35%, what is the tax implication of the sale of this asset?

Round to the nearest penny. If tax liabilities, type a negative sign in front. Do not include a dollar sign in your answer. (i.e. If your answer is tax liabilites of $8,765,43, type -8765.43; if tax shield of $8,765.43, type 8765.43).

Answer 1

When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated based on the book value of the asset at the time of disposal. If a loss has occurred, a tax credit is recorded.

At the time of disposal, the asset is sold below it book value then it has incurred a loss

Loss = [(current book value (salvage value) – sale price of the asset]

As the loss has occurred, a tax credit is calculated in following manner -

Tax credit = [(current book value (salvage value) – sale price of the asset] * tax rate

Where,

Current book value (salvage value) = $500,000

Sale price of the asset = $300,000

Tax rate = 35%

Therefore,

Tax credit = [$500,000 - $300,000] *35%

=$200,000 * 35% = $70,000

Therefore the tax implication of the sale of this asset is tax credit or tax gain of $70,000