Equipment associated with manufacturing small railcars had a first cost of $180,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $620,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 36%, what would be the difference in taxes paid in year 2 if the depreciation method were straight line instead of MACRS? The MACRS depreciation rate for year 2 is 32%.
What will be an ideal response?
DSL = (180,000 – 30,000)/5 = $30,000
DMACRS = 180,000 (0.32) = $57,600
Difference in taxes = (57,600 – 30,000)(0.36)
= $9936 (less taxes paid for MACRS)
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