Question

2. Compute the allowable MACRS, section 179 and special first year write-off for Good Corp. (GC). GC elected all write-offs unless indicated otherwise. Use exhibit 10-3 on page 10-9 for MACRS period if it is not stated in given facts.

a. In September 2019 GC purchased five fork-lifts (five-year items). Cost 200,000 each (total 1 million). GC declined section 179 and special first year write off on these items. In 2021 GC sold one of the fork lifts for 85,000. What is MACRS amounts for GC for all fork lifts until they are completely written off. What is gain or loss, if any on sale of fork lift in 2021? Is it capital or ordinary, long term or short term?

Answer 1

Based on the question, we can summarize the data given in the question as follows :-

Cost price of Fork Lifts = $200,000 per fork lift * 5 fork lifts = $1,000,000

Depreciation Method Adopted = MACRS

MACRS Life = 5 years

Sale of 1 forklift during 2021

Sale Price = $85,000

For our analysis, we can group 5 machines into Forklift 1, Forklift 2, Forklift 3, Forklift 4 and Forklift 5.

As per the question, the company has declined to adopt the Section 179 and Sepcial first yeaer write off on the Forklifts. Hence we will calculate the depreciation expenses on these forklifts using the MACRS approach.

Since there is one Forklift that is sold in 2021 , we can calculate the MACRS Depreciation for that particular Forklift separately. However, for Forklift 1 - Forklift 4, the MACRS depreciation can be calculated as follows :-

Year	Depreciable Base	MACRS Rate	Amount
	(200,000 * 4 forklifts)
2019	800,000	20.00%	160,000
2020	800,000	32.00%	256,000
2021	800,000	19.20%	153,600
2022	800,000	11.52%	92,160
2023	800,000	11.52%	92,160
2024	800,000	5.76%	46,080
	Total		800,000

Note:- We use the MACRS Half Year convention table in populating the MACRS rates above as the company has not placed 40% of total assets during the last quarter of the year for it to qualify in using the Mid quarter convention.

The Depreciation for the Forklift 5 can be calculated as follows

Year	Depreciable Base	MACRS Rate	Amount
2019	200,000	20.00%	40,000
2020	200,000	32.00%	64,000
2021	200,000	19.20%	19,200	Note 1
	Total		123,200

Note 1:- Per IRS, the depreciation amount charged during the year of sale of the asset should be 50% of the otherwise actual Depreciation expenses charged for the year. As such, for Forklift 5, since it is sold during 2021, the Depreciation charges are calculated as follows :-

2021 = $200,000 * 19.20% = $38,400 *1/2 = $19,200

Book Value of Forklift 5 at the time of the sale was = $200,000 - $123,200 = $76,800

Sale Value of Forklift 5 = $85,000

Since the sale value of Forklift 5 is greater than the Carrying/book value of Forklift 5, there is a gain on the sale of equipment.

Gain = $85,000 - $76,800 = $8,200

Nature of Gain:-

The Nature of the gain for GC can be determined to a Long term capital gain. The forklift was purchased in 2019 and was sold in 2021 which falls under the criteria for "Long Term". Also, since this involves the sale of capital assets used in a business, it can be classified as a "Long Term Capital Gain".

The total Depreciation expenses for GC Corp over the life of Forklifts is as follows:-

Year	Total MACRS Depreciation
2019	200,000
2020	320,000
2021	172,800
2022	92,160
2023	92,160
2024	46,080
Total	923,200