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 liabilities of $8,765,43, type -8765.43; if tax shield of $8,765.43, type 8765.43).

Answer 1

As the asset is selling at a lower price than book value, the result is a capital loss. The company will get some tax benefit by reducing taxable income i.e. tax shield.

Tax shield = Value of tax deductable expenses x Tax rate

                   = (Book value – Market value) x Tax rate

                   = ($ 500,000 - $ 300,000) x 35 %

                   = $ 200,000 x 0.35 = $ 70,000

The company will experience a tax shield of 70,000