ABC corporation has the following activities that should generate book/tax diffe
ID: 2479072 • Letter: A
Question
ABC corporation has the following activities that should generate book/tax differences in 2014:
a) Purchased $100,000 of 5 year property. Straight-line depreciation is used for book purposes. (Assume ½ year convention for both book and tax).
b) Purchased $300,000 of 7 year property. $100,000 is immediately expensed under §179. Straight-line depreciation is used for book purposes. (Assume ½ year convention for both book and tax).
c) Sold a piece of land held for investment, generating a $500,000 gain. The installment method was elected for tax purposes, resulting in ½ of the gain being recognized in the current, and 25% in each of the next 2 years.
d) Bad debt expense for book purposes is $20,000.
These are all expected to occur within the next 12 months. Assuming a 25% federal tax rate, and a 6% state tax rate, how much of a deferred tax asset/liability would be generated from these activities?
Explanation / Answer
a) Purchased $100,000 of 5 year property. Straight-line depreciation is used for book purposes. (Assume ½ year convention for both book and tax). – In this case the IRS rate of depreciation will be 20% in the first year which is $ 20000, also under Straight line method the depreciation for 1st year will be $ 20000. So there is no deferred Tax or Liability.
b) Purchased $300,000 of 7 year property. $100,000 is immediately expensed under §179. Straight-line depreciation is used for book purposes. (Assume ½ year convention for both book and tax). – In this case $ 100000 will available for immediate deduction under Section 179. However in the books, the deduction will be ($300000/7) $42857. So there is extra deduction of $ 57142 for tax purpose and it will result in a Tax liability of $17715.
c) Sold a piece of land held for investment, generating a $500,000 gain. The installment method was elected for tax purposes, resulting in ½ of the gain being recognized in the current, and 25% in each of the next 2 years. – Tax will be paid only on the 50% of amount only so it will create a Tax liability on $ 250,000 for coming years. So Tax liability in this case is ($ 250000 * 25%)+(($ 250000 * 6%) = $ 77500
d) Bad debt expense for book purposes is $20,000. – This will also be available for deduction for Tax purpose also assuming it has met all condition of IRS babdebts qualification, so there will be no Deffered Tax Asset or Liability for this.