(b) Tax depreciation amount for 2016:
9.37 Given: Cost basis = $85,000 + $4,500 = $89,500
(a) Book depreciation schedule (Depreciation basis = $89,000)
(b) Tax depreciation schedule (Depreciation basis = $89,500)
Comments: The accessories costing $5,000 that were incurred in 2015 do not
change the depreciation schedule, because these neither extended the machine’s
life nor resulted in any additional salvage value.
n
Dn
Bn
Cum. Dn
2013
$10,688
$78,813
$10,688
n
Dn
Bn
Cum. Dn
2013
$12,790
$76,710
$12,790
Corporate Tax Systems
9.38
Net income calculation:
Gross income 35,000,000$
Expenses:
9.39
(a) Taxable income = $8,500,000 – $2,280,000 – $456,000 = $5,764,000
9.40
(a) Income tax liability:
Gross revenues 3,500,000$
Expenses:
(b) Operating income:
Taxable operating income 2,490,000$
Gains or Losses
9.41
Allowed depreciation $200,000(0.1429 0.2449 0.1749 0.1249 / 2)
= + + +
9.42 (a) Disposed of in year 3:
Allowed depreciation $80,000(0.20 0.32 0.192 / 2)
= ++
(b) Disposed of in year 5:
Allowed depreciation $80,000(0.20 0.32 0.192 0.1152 0.1152 / 2)
= ++ + +
(c) Disposed of in year 6:
9.43
(a) If sold at $20,000:
Loss $20,000 $93,713 ($73,713)
Loss credit $73,713(0.34) $25, 062
=−=
= =
(b) If sold at $99,000:
9.44
9.45 Given: I = $80,000, S = $20,000, N = 8 years.
(a) Book value on December 31, 2017 using SL depreciation method
n Dn Bn Cum. Dn
2014
$7,500
$72,500
$7,500
(b) Depreciation amount for 2017 using DDB
n Dn Bn Cum. Dn
2014
$20,000
$60,000
$20,000
(c) Optimal time to switch: year 2018
n
D
n
B
n
Cum. D
n
2014
$20,000
$60,000
$20,000
(d) Taxable gains:
Marginal Tax Rate in Project Evaluation
9.46
(a) Economic depreciation for the milling machine
(b) Marginal tax rates with the project:
n Revenue Dn
Taxable
income
Combined
income
Marginal
rate
1 $80,000 $28,580 $51,420 $476,420 34%
(c) Average tax rates
n
Combined income
Combined income taxes
Average tax rate
1
$476,420
$161,982.80
34%
9.47 Incremental tax rate calculation:
Year 1
Year 2
Revenue
$220,000
$220,000
Operating costs
$150,000
$150,000
Taxable income
Year 1
Year 2
Taxable income without project
$650,000
$650,000
Income taxes
$221,000
$221,000
Taxable income with project
$708,000
$700,800
$240,720
$238,272
Incremental taxable income
Incremental income taxes
2
$456,020
$155,046.80
34%
3
$470,020
$159,806.80
34%
4
$480,020
$163,206.80
34%
5
$487,140
$165,627.60
34%
6
$496,080
$168,667.20
34%
9.48
Economic condition
Good Fair Poor
Taxable income
Before expansion
$ 2,500,000
$ 2,500,000
$ 2,500,000
9.49 Incremental tax calculations:
(a) Additional taxable income due to project:
Year 1 Year 2 Year 3
Annual revenue
$80,000
$80,000
$80,000
$43,335
$37,775
$56,298
(b) Additional income tax calculation:
Year 1
Year 2
Year 3
Taxable income without
project
$350,000 $350,000 $350,000
(c) Gains tax:
Total depreciation $42,593
=
Income Taxes
$ 1,530,000
$ 1,020,000
$ 816,000
(a) Marginal tax rate
Combined Marginal Income Tax Rate
9.50
(a) Explicit calculation of state income taxes:
(b) Tax calculation based on the combined tax rate:
9.51
(a) Marginal tax rates:
(b)
9.52
(a) Additional annual taxable income due to expansion = $30,000
(b) Average tax rate after business expansion $61,250/ $200,000 = 30.63%
(c) PW of income taxes:
Depreciation schedules: depreciation base = $20,000
n
MACRS
1
$ 6,666
2
$ 8,890
3
$ 2,962
4
$ 1,482
Incremental income taxes under 3–year MACRS
Operating Year
Year 1
Year 2
Year 3
Revenue
$50,000
$50,000
$50,000
Expense
$20,000
$20,000
$20,000
9.53
n
n
D
(a)
1n
B−
(b) taxes
1
$ 500,150
$3,500,000
$42,000
2
$ 857,150
$2,999,850
$35,998
3
$ 612,150
$2,142,700
$25,712
4
$ 437,150
$1,530,550
$18,367
5
$ 312,550
$1,093,400
$13,121
6
$ 312,200
7
$ 312,550
8
$ 156,100
Short Case Studies
ST 9.1 Given: I = $82,000 + $3,000 = $85,000, N = 10 years, S = $3,000
• Book depreciation expenses for 2010:
• Book depreciation expenses for 2013:
ew depreciation basis $60, 400 $8, 000 $68, 400
N= +=
n
D
n
B
n
2013
$6,540
$61,860
• Book depreciation expenses for 2016:
New depreciation basis $48,780 $5,000 $53,780
= +=
n
D
B
ST 9.2
(a) Depletion basis = $32.5 million – $3 million = $29.5 million
Depletion allowance per bbl =
$29,500,000 $4.54 per bbl
6,500,000
=
ST 9.3
(a) Incremental Operating income:
Year
1
2
3
4
5
Revenue
$15,000,000
$15,000,000
$15,000,000
$15,000,000
$15,000,000
Mfg. Cost
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000
7,085,500
6,575,500
6,925,500
7,175,500
7,576,750
(b) Gains or losses:
Total depreciation $3, 661, 250
=
ST 9.4
(a) If Diamond invests in the facilities and markets the product successfully, the
expected tax rate in each year will remain at 34%. Since the local and state
(b) Gains or losses
• Plant (39-year MACRS):
Total depreciation (2.4573% 2.5641% 2.4573%)($10,000,000)
= + ++
• Equipment (7-year MACRS):
8
Total depreciation $40,000,000
0
Ordinary gains $4,000,000
B
=
=
=
• Net gains:
(c) Net operating income (unit: $1,000)
n 1 2 3 4 5 6 7 8
Revenue $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Expenses :
Taxable Income for State $3,038 ($1,052) $1,748 $3,748 $5,172 $5,176 $5,172 $6,970
Net Income $1,905 ($660) $1,096 $2,350 $3,243 $3,245 $3,243 $4,370
Corporate operating losses: Ordinary operating losses (say,
year 2) can be carried back to each of the preceding 3 years and