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Unformatted text preview: new asset by reducing the proceeds from the sale of the
The sale of the asset for more than its book value but less than its initial purchase
price If Hudson sells the old asset for $70,000, there is no capital gain. However,
the firm still experiences a gain in the form of recaptured depreciation of $22,000
($70,000 $48,000), as shown under the $70,000 sale price in Figure 8.5. This
recaptured depreciation is taxed as ordinary income. Because the firm is assumed
to be in the 40% tax bracket, the taxes on the $22,000 gain are $8,800. This
amount in taxes should be used in calculating the initial investment in the new
The sale of the asset for its book value If the asset is sold for $48,000, its book
value, the firm breaks even. There is no gain or loss, as shown under the $48,000 5. Although the current tax law requires corporate capital gains to be treated as ordinary income, the structure for
corporate capital gains is retained under the law to facilitate a rate differential in the likely event of future tax revisions. Th...
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- Fall '13