Question - Book vs. Cash Taxes and Asset Sales

Several things here. Gains and losses can be recorded for many things, but let’s assume we are talking about fixed assets in the examples below.

1. Fixed assets will most of the time have different carrying values (cost minus accumulated depreciation) for book (GAAP) and tax purposes because both methods of accounting can use different depreciation methods, among other things.

1. Because of this, the book and tax gains/losses can be different (proceeds minus carrying value).

1. Given the gain/loss differences, the cash taxes you pay to government will be different than if you calculated taxes on your book income. Say for book purposes you have a gain of $10 and for tax you have a gain of $15. On your tax return, you reverse the $10 book gain and add in the $15 tax gain, thus “increasing” your cash taxes relative to what they would have been if you had calculated tax on your book income.

1. For deferred taxes, I highly recommend you think about them as a comparison of book carrying value vs tax carrying value (basis) times a tax rate. If a company’s fixed asset book basis is $300 and tax basis is $200 and the tax rate is 20%, then there will be a DTL of $20. This reflects fact that there is $100 of book basis that will generate depreciation expense on the financial statements that will NOT be recorded on the tax return (likely because it was already taken on accelerated basis for tax). So to your exact question, the impact on deferred taxes due to an asset sale depends on how it changes the book vs tax basis comparison. If the sale removed more book basis than tax basis, then your DTL goes down, and vice versa if opposite is true.

Hope that helps.