Question

Frank operates a construction business in Dallas, Texas. On May 1, 2019, Frank purchased a warehouse for his business. The warehouse cost $1,500,000 ($500,000 for land and $1,000,000 for improvements). In November 2019, Frank purchased the following business property: equipment for $100,000, light-duty truck for $50,000, and office furniture and equipment for $50,000. Please calculate Frank’s 2019 depreciation deductions. Be sure to explain your calculations fully.

What income would Frank report if he decided to sell the warehouse and equipment on January 1, 2021 so he could upgrade the business? Assume he could sell the warehouse for $1,500,000 and the equipment for $190,000 ($95,000 for equipment, $47,500 for truck, and $47,500 for office furniture and equipment).  Be sure to fully explain your answer.

Answer 1

Land is not depreciable but warehouse is 39 year depreciable non-residential real property.

Mid quarter convention is applicable on personal property as all property is placed in service during fourth quarter. Mid quarter depreciation tables used in calculaiton.

Depreciation for the year 2019 is:

	(a)		(b)	(a) X (b)
Property	MACRS Basis	Recovery period	Depreciation Rate	MACRS depreciation
Equipment	$       100,000	7 year	3.57%	$     3,570.00
Truck	$         50,000	5 year	5.00%	$     2,500.00
Furniture	$         50,000	7 year	3.57%	$     1,785.00
Building	$    1,000,000	39 years	1.605%	$   16,050.00
Cost recovery				$   23,905.00

Depreciation for 2020 is:

	(a)		(b)	(a) X (b)
Property	MACRS Basis	Recovery period	Depreciation Rate	MACRS depreciation
Equipment	$       100,000	7 year	27.55%	$   27,550.00
Truck	$         50,000	5 year	38.00%	$   19,000.00
Furniture	$         50,000	7 year	27.55%	$   13,775.00
Building	$    1,000,000	39 years	2.564%	$   25,640.00
Cost recovery				$   85,965.00

During 2021 assets are sold. Depreciation for 2021 is:

Depreciation on warehouse is calculated under mid-month convention. Asset is sold in January. one-half month depreciation is allowed as a result.

Equipment, truck and furniture are sold in fourth quarter. They use mid quarter convention. Only half-quarter worth depreciation allowed as assets are sold in first quarter.

Depreciation for 2021 is:

Property	MACRS Basis	Recovery period	Depreciation Rate	MACRS depreciation	× allowed percent	Allowed depreciation
Equipment	$       100,000	7 year	19.68%	$   19,680.00	0.125	$     2,460.00
Truck	$         50,000	5 year	22.80%	$   11,400.00	0.125	$     1,425.00
Furniture	$         50,000	7 year	19.68%	$     9,840.00	0.125	$     1,230.00
Building	$    1,000,000	39 years	2.564%	$   25,640.00	0.041667	$     1,068.33
Cost recovery						$     6,183.33

Gain or loss on sale of assets is:

Particulars	Equipment	Truck	Furniture	Land and Building
Cost	$          100,000	$            50,000	$            50,000	$       1,500,000
Less: depreciation
year 2019	$         3,570.00	$         2,500.00	$         1,785.00	$      16,050.00
year 2020	$      27,550.00	$      19,000.00	$      13,775.00	$      25,640.00
year 2021	$         2,460.00	$         1,425.00	$         1,230.00	$         1,068.33
Adjusted basis	$      66,420.00	$      27,075.00	$      33,210.00	$ 1,457,241.67
Selling price	$            95,000	$            47,500	$            47,500	$       1,500,000
less: adjusted basis	$      66,420.00	$      27,075.00	$      33,210.00	$ 1,457,241.67
Gain on sale of asset	$      28,580.00	$      20,425.00	$      14,290.00	$      42,758.33
Total gain	$    106,053.33

Total gain on sale of assets is $106,053.33

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