Question

10 years 10% Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year Recovery year 3 years 5 years 7 years 33% 20% 14% 45% 32% 25% 15% 19% 18% 7% 12% 12% 12% 9% 9% 18% 14% co VOU AWN- 4% Totals 100% 100% 100% 100% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention.

Answer 1

Hi,

Data given:

Installed cost of computerized lens grinder = $82500

The product falls into 5 years Cost recovery period / (usable years) as per MACRS with 20% of purchase cost to be recovered in 1st year.

So, Depreciation expense in 1st year / this year= 20% x $82500 = $16500

as per the given pretax income the company would fall into the tax bracket of 34% marginal rate. so lets calculate the initial tax liability without considering the above depreciation expense.

Tax liability = $113,900 + (($436,000 - $335,000) * 34%) ; i.e. base tax + 34% of income over $335,000 (follow corporate tax schedule) = $ 148,240

However the new reported pretax income would be $436,000 - $ 16500 = $419,500 (reducing the depreciation expense)

New tax liability = $113,900 + (($419,500 - $335,000) * 34%) , same goes with earlier logic

So new tax liability = $142,630

Tax savings = $ 148,240 - $142,630 = $5610