Threeyear property class type equipment bought for 30000 is

Three-year property class type equipment bought for $30,000 is being disposed of for $20,000 at the end of three years. The company is at a 34% tax bracket. How much profit did the company make on the equipment?

Solution

For an equipment with 3-year life,

MACRS depreciation, year 1 = $30,000 x 33.33% = $10,000

MACRS depreciation, year 2 = $30,000 x 44.45% = $13,335

MACRS depreciation, year 3 = $30,000 x 14.81% = $4,443

Accumulated depreciation = $(10,000 + 13,335 + 4,443) = $27,778

Book value after 3 years = $(30,000 - 27,778) = $2,222

Gain on sale of equipment = $(20,000 - 2,222) = $17,778

After-tax profit = $17,778 x (1 - 0.34) = $17,778 x 0.66 = $11,733.48