Question

Problem 17.035: Calculate tax liability in yr2

Problem 17.035: Calculate tax liability in yr2 An in-place machine with B= $105,000 was depreciated by using Modified Accelerated Cost Recovery System (MACRS) over a 3- year period. The machine was sold for $60,000 at the end of year 2 when the company decided to import the item that required the use of the machine. In year 2, gross income (GI) = $1 million and operating expenses (OE) = $500,000. Determine the tax liability in year 2 if Te = 35%. The tax liability in year 2 is determined to be $ 157888.3 -

I've looked at and attempted probably 20 solutions on here, and not one person has solved it. Please save me.

Answer 1

Given Machine book Value at end of year 2 Sale Value at end of year 2 Gross Income Operating Expenses Tax Rate (Te) 105000 $ 60000 $ 1000000 $ 500000 $ 35% Solution Step 1: Calculate Loss on sale of machine Particulars Sale Value Less: Book Value Profit/-Loss Amount 60000 105000 -45000 Hence, Loss on sale is 45000 Step 2: Calculate Total Income and Tax Liability Particulars Gross Income Less: Operating Expenses Less: Loss on sale of machine Total Income Tax Rate Tax Liability (Total Income X Tax Rate) Amount 1000000 500000 45000 455000 35% 159250 Hence, Tax Liability for year 2 is $159250 Note: It has been assumed that $ 105000 is Book Value at end of 2nd Year.