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Let's expand on the example that we had of purchasing the vehicle that $10,000 car with cash and what we're going to do is we're going to make it so that you sell it before the thing has become fully depreciated the big point here is that we're going to sell the car for something other than its Book value you have to remember that what you're doing with depreciation is your formulaic Lea deciding how it's losing value over time and when you make a transaction you find out how much it's actually worth and it's an absolute miracle if the book value of the vehicle is exactly the same as the sales price so what we're doing is we're starting with that $10,000 car which you have right there that we started with before um that's our cost basis we're dealing with the minimum acceptable turn of 5% that's almost irrelevant right now we're dealing with 35% federal tax rate at 7 point 7 percent state tax rate and just to go ahead and get the recollection if you're looking for that combined tax rate what you're doing is you're adding up the state and federal rate and then you're subtracting off the difference between those two so let's take a look over here at what we have lined up as that cash flow that's just the car and you can think of this is what it looks like from a personal finance basis there's your $10,000 going out the door because you're purchasing the vehicle and what we've done is said that we're going to sell this car for about $5,000 in the fourth year that you own it now look and see what happens with depreciation remember the depreciation is always just going to be the cost basis of the car at $10,000 times the number that's in that modified accelerated cost recovery system table so in this case what we're doing is we're just seeing that the depreciation the first year is just ten thousand times that point - that's right there because you get 20% of the cost basis as depreciation the first year you get 32% the second year and that's why we have $3,200 with the depreciation in the second year so you follow the pattern in the table until you get down to the year of sale and what happens there with the early sale is is you get half of the depreciation that year and we mean that quite literally just cut it in two you don't do anything fancier than that so looking at just the depreciation component what we have here in this column for tax savings what is the reduction in taxes because of the depreciation and so what we're doing here is just taking the depreciation which is $2,000 times that combining tax rate we calculated before and that's how much your tax are can be lower by because of depreciation we're doing it which one of these items down here in the after-tax cash is again just as we did before all we're doing is taking the pre-tax the column now that says car we're adding in the tax savings and except for adjusting the taxes that you end up with for getting depreciation wrong relative to the sales price that's that's what the cash flow will look like but here's where this depreciation recapture comes in we're looking at is what happens when you sell the car for something other than its Book value but for something less than what you paid for it so we're looking at only ordinary gains and ordinary losses on sale rather than capital gains that are there so what I'm doing with Book value is I am just if you look at the equation starting off with its cost basis that I'm subtracting off the depreciation in that year so I'm starting up with the $10,000 I'm subtracting off 2,000 dollars for the first years depreciation and I see that the book value after the first year is $8,000 now in the second year what we've seen is that there is depreciation of 3,200 dollars the book value after the second year is $4,800 and so on down the line until you get to that year of sale you find out that the book value is twenty three hundred and four dollars now note that this book value is different from the amount that we've actually sold the car for the book value is lower so what's been going on is that over the past couple of years we've been paying less taxes that we should have and so when you sell the car Uncle Sam basically says hey you roll with some money go ahead and pay the taxes back so that's what we're doing here is we are adjusting those tax payments with this gains tax : and all I'm doing here is I'm creating something which is the difference between the sale value of the car $5,000 and its Book value and I'm just multiplying it by that combined tax rate now for corporations this is everything is going to work out just fine here it's going to work fine for businesses this is essentially you paying back taxes that you should have paid before please note that this is a zero interest loan so everything works out well not a big deal but look what happens to the after-tax cash flow while if you didn't have to pay back all that depreciation you would have had cash flow in year four five thousand two hundred thirty dollars and forty three cents because you have to pay back all that depreciation or at least the tax value the depreciation to the government you were positive cash flows only four thousand one hundred fifty one dollars and 89 cents so again this is what happens when you sell a car for something other than its

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