In calculating the tax portion of the ERAT figure, what do you do with a loss? Do you multiply the amount of the loss by the tax rate on recaptured deprecation and add as part of ERAT (as a credit to ERAT)?
Please help! An example follows. Thanks
Imagine the following hypothetical question:
Marginal tax rate: 30%
Tax on recaptured depreciation: 35%
Sale price: $45,000,000
Selling costs:
Net sale price: $41,850,000
Purchase price: $50,000,000
Accumulated depreciation:
Net book value: $43,750,000
Net sales price - net book value = $41,850,000 - $43,750,000 = loss
I would think at that point it becomes like any other asset you’ve sold - you’ve taken a loss on it. You’ve sold it for less than book value.
If you buy a plant for 100, take 20 in depreciation on it, and sell it a year later for 90, the gain is 10. You’re taxed on the capital gain over book value. If you sell it for 70, you’ve taken a loss on it and it deducts from taxable income. If you sell it for 110, 20 is taxed at recaptured depreciation and 10 is taxed as a capital gain.
This is different from a typical investment in that you’ve taken depreciation on it. Your original cost is the “basis” (ignoring improvements, etc), which depreciation is calculated off of. If you sell it for more than the basis, but have also claimed depreciation on it, you need to reverse the effects of that and pay taxes.