Question

Ben is considering acquiring a new automobile that he will use 100% for business. The purchase price of the automobile would be $64,500. If Ben leased the car for five years, the lease payments would be $875 per month. Ben will acquire the on January 1, 2020. The inclusion dollar amounts from the IRS table for the next five years are $63, $140, $208, $251, and $289. Ben wants to know the effect on his adjusted gross income of purchasing versus leasing the car for the next five years. He does not claim any available additional first-year depreciation. Write a letter to Ben to present your calculations. Then prepare a memo for the tax files on these matters. Ben's address is 150 Avenue I Memphis, TN 80800

Please clearly explain the calculations and explain how to write the letter and memo.

Answer 1

To Ben,

150 Avenue I memohis,

TN 80800

Subject: Tax Computation

Dear Ben,

If the option one is opted and the car is purchased then you would be eligible to depreciation on the same i.e $ 67500 divided by 5 for every year i.e 13500 every year but the amount for buying the car needs to be paid at the initial date

If option 2 is selected and the car is taken on lease, that would be eligible to take deductions for the interest on the lease payment Rs 64500- (875*12*5) = $12000 over the period of 5 years. Plus you need to show additional revenue every year as per the incusion amount. $63, $140, $208, $251, $289 for every year respectively. i.e $ 951 over the period of 5 years. In short you would be able to take deduction of Rs 12000-951= $ 11049 over the period of 5 years but the amount spend every year would be $ 10500 as comparison to option 1 Rs 67500 at initial date

Hope you are able to chosse between the two.

Thanks & Regards