Salvage value is the value a company or individual receives, or expects to receive from the sale of an asset at the end of the asset’s useful life.
When a company or an individual sales an asset, the IRS requires them to pay taxes on the amount of the sale that exceeds book value. If a company sold a truck for $2000 and the book value was $1500 then the company would have to pay taxes on the additional $500 that they received over the book value.
If the asset is sold for less than book value the difference will be treated as a loss for tax purposes. The after tax salvage value formula is shown below:
Salvage value = market value
book value = The value that has not yet been depreciated according to the depreciation schedule. For example, if an asset is worth $10,000 and has a 5 year life, according to a straight-line depreciation schedule it would depreciate $2000 per year = $10,000/5. Suppose in year 5 the company that purchased the asset sold it for $1000. What would the after tax salvage value be? See the excel example below
Taxable Salvage Value = Accumulated Depreciation — (Purchase Price — Salvage Value)
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