Need to pay more taxes or less taxes?

When an asset is purchased and depreciated over the course of multiple years the business should be tracking its "book value" (BV) - The BV is the portion of the purchase that has not yet been depreciated.

For example if the machine cost $10,000 to purchase and they deduct $2500 depreciation the first year, the machine now has a "book value" of $7,500

This continues each year until they have deducted all of the initial purchase price. Once that happens the "book value" is $0 and they cannot take any further deductions for the purchase of this machine.

When the machine is sold, they record a profit or loss based on the actual sale price relative to the book value.

So lets say its been a little over 2 years, they've deducted $2500 twice, so the machine has a book value of $5000 (This means there is $5,000 worth of the original purchase which has not yet been deducted).

If they sell the machine for more than the BV - say $6,000 then they have a $1,000 profit ($6,000 sale price - $5,000 book value) so they add $1,000 to their profits for tax purposes.

If they sell the machine for less than the BV - say $3000 then they have a $2,000 loss ($5000 book value - $3000 sale price), so they would deduct that $2,000 loss this tax year.

Another way to understand this is that whatever they actually get when they sell the machine is revenue, and all of the remaining book value gets deducted right away.

So if they sell it for $6,000 they report $6,000 in revenue, but they instantly deduct all of the remaining book value ($5,000 in this example), leaving them with a $1000 increase in their net profits.

When done correctly this ensures that the company eventually deducts exactly the amount they spent on the machine minus what they made back from selling it. If they never sell it they deduct the full amount paid.

1)  The cash goes in the bank account.

2)  If the equipment is sold for more than its basis, there will be a taxable gain.  If it is sold for less than its basis, there will be a tax deductible loss.  Basis is the cost of the equipment less depreciation claimed.

So.......it depends.