So after paying $50k for the van initially, at the end of the 5y term if you sell it for $20k you still have to pay additional $2.1k, which mean the total cost of the van was $52.1k, not including all the other costs on top. So you're paying taxes again on top of something you've already paid taxes for when you bought the van. What are the tax savings that you could claim during those 5 years of having that van?
You claim tax deduction on the depreciation. So, as an example, let’s suppose that in the first year of using the van, you generate revenue of $10,000. And let’s further assume that your total cost of operations (eg raw materials, drivers salary etc) was $8,000. So you have a profit of $2,000. If your tax rate is, say, 30%, you would pay 30% of $2,000 = $600 in taxes. HOWEVER, if the vans depreciation for the year is $1,000, then you will say “That’s my cost of operating the van as well”, which means you will deduct this from $2.000 and instead show (operating) profit of $1,000 ($2,000 - $1,000). Thus you will pay taxes of only $300 (30% of $1,000). In other depreciation expense allowed you to save $300 ($600 -$300) in taxes. Hope that helps. Appreciate your question! And happy to answer any other questions you may have.
great to have your insights. Please, allow me to ask: if the salvage value of an asset is $16,000 and the initial cost of that asset was $70,000 and the useful life is 7 years, am I right to say that the salvage value of $16,000 (selling price) corresponds to the book value? If that's so, S=B and I don't pay taxes, but I will only consider $16,000 for the calculation of the after tax salvage value (plus/minus working capital if any), right? thanks in advance!
Good question! The book value and salvage value are not necessarily the same. Book value depends on how you are depreciating the asset. Salvage value, on the other hand, depends on what you can seek the asset for in the market. If you depreciate the asset a whole lot in the early years of its useful life, the salvage value can be (and often is) higher than the book value. That said, if you depreciate the asset such that the book value ends up being equal to the value at which you salvage it, then yes, you will not owe any taxes when you salvage the asset.
Hi. I’m using the term Salvage Value to denote the price at which you will be selling the asset, as we typically do in finance. So there is no difference between the two. If instead you meant “ what if the price (or salvage value) is higher than BOOK value (which is what the asset is worth on the books based on how it’s been depreciated over time…” then the answer is, you would pay a tax on the difference.
Thank you professor, the video helps me understand the concept!
Oh welcome back! ❤️ Great video, clear explanation as usual ❤️
Thank you for your clear explanation.
So after paying $50k for the van initially, at the end of the 5y term if you sell it for $20k you still have to pay additional $2.1k, which mean the total cost of the van was $52.1k, not including all the other costs on top. So you're paying taxes again on top of something you've already paid taxes for when you bought the van. What are the tax savings that you could claim during those 5 years of having that van?
You claim tax deduction on the depreciation. So, as an example, let’s suppose that in the first year of using the van, you generate revenue of $10,000. And let’s further assume that your total cost of operations (eg raw materials, drivers salary etc) was $8,000. So you have a profit of $2,000. If your tax rate is, say, 30%, you would pay 30% of $2,000 = $600 in taxes. HOWEVER, if the vans depreciation for the year is $1,000, then you will say “That’s my cost of operating the van as well”, which means you will deduct this from $2.000 and instead show (operating) profit of $1,000 ($2,000 - $1,000). Thus you will pay taxes of only $300 (30% of $1,000). In other depreciation expense allowed you to save $300 ($600 -$300) in taxes.
Hope that helps. Appreciate your question! And happy to answer any other questions you may have.
thank you so much! greetings from Italy!
great to have your insights.
Please, allow me to ask:
if the salvage value of an asset is $16,000 and the initial cost of that asset was $70,000 and the useful life is 7 years, am I right to say that the salvage value of $16,000 (selling price) corresponds to the book value?
If that's so, S=B and I don't pay taxes, but I will only consider $16,000 for the calculation of the after tax salvage value (plus/minus working capital if any), right?
thanks in advance!
Good question! The book value and salvage value are not necessarily the same. Book value depends on how you are depreciating the asset. Salvage value, on the other hand, depends on what you can seek the asset for in the market. If you depreciate the asset a whole lot in the early years of its useful life, the salvage value can be (and often is) higher than the book value. That said, if you depreciate the asset such that the book value ends up being equal to the value at which you salvage it, then yes, you will not owe any taxes when you salvage the asset.
@@professorikram so much appreciated your reply. Take care
If i sell the asset with a Price higher than the salvage value, how would i calculate the tax ?
Hi. I’m using the term Salvage Value to denote the price at which you will be selling the asset, as we typically do in finance. So there is no difference between the two.
If instead you meant “ what if the price (or salvage value) is higher than BOOK value (which is what the asset is worth on the books based on how it’s been depreciated over time…” then the answer is, you would pay a tax on the difference.
Thank you for this
thank you
thanks