Question

Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $410,000 on May 20, 2017. Lori expects the taxable income derived from her business (without regard to the amount expensed under § 179) to be about $800,000. Lori wants to elect immediate § 179 expensing, but she doesn't know which asset she should expense under § 179. She does not claim any available additional first-year depreciation. Click here to access Exhibit 8.1 and the depreciation table to use for this problem. If an amount is zero, enter "0". a. Determine Lori's total cost recovery deduction if the § 179 expense is first taken with respect to the 5-year class asset. 5-year class property Immediate expense deduction under § 179 $ Regular MACRS 7-year class property Immediate expense deduction under § 179 $ Regular MACRS Total deduction $ Feedback b. Determine Lori's total cost recovery deduction if the § 179 expense is first taken with respect to the 7-year class asset. 7-year class property Immediate expense deduction under § 179 $ Regular MACRS 5-year class property Immediate expense deduction under § 179 $ Regular MACRS Total deduction $ Feedback Correct c. If § 179 expense is first allocated to the seven-year class property, the deduction for the year would be $ larger. Feedback Correct For parts d. and e. Assume a 6% discount rate The present value factors for a 6% discount rate are as follows: Year 1: 1.000, Year 2: 0.9434; Year 3: 0.8900, Year 4: 0.8396, year 5: 0.7921, Year 6: 0.7473, Year 7: 0.7050, Year 8: 0.6651. Hint: Set up two analysis - on to find present value of tax saving with Section 179, and one without Section 179. Then compare them. If required, round computations to the nearest dollar.

d. Assume that Lori is in the 25% marginal tax bracket and that she uses § 179 on the 7-year asset. The present value of the tax savings from the depreciation deductions for both assets $. Feedback Incorrect

e. Assume that Lori is in the 25% marginal tax bracket and that Lori decides not to use § 179 on either asset. The present value of the tax savings generated by using the § 179 deduction on the 7-year asset $.

pls help to solve part E

Answer 1

• A) Calculation of total cost recovery if the § 179 expense is first taken for 5 years class asset.

5 years class property
Immediate expense deduction under § 179	$200,000
7 years class property
Immediate expense deduction under § 179 (500,000-200,000)	$300,000
MACRS cost recovery (410,000-300,000)*0.1429	$15,719
Total Deduction	$515,719

• B) Calculation of total cost recovery if the § 179 expense is first taken for 7 years class asset.

7 years class property
Immediate expense deduction under § 179	$410,000
5 years class property
Immediate expense deduction under § 179 (500,000-410,000)	$90,000
MACRS cost recovery (200,000-90,000)*0.20	$22,000
Total Deduction	$522,000

• C) The deduction for year would be $6,281 ($522,000-$515,719) larger if § 179 deduction is first allocated to 7 years class property (i.e. longer lived asset).

• D) Calculation of Tax savings on depreciation (Amount in $)

Years	MACRS Depreciation (i)	Tax savings on depreciation [(ii) = (i)*25%]	PVF@6% (iii)	Present value of tax savings [(ii)*(iii)]
1	(110,000*20%) = 22,000	5,500	0.943	5,187
2	(110,000*32%) = 35,200	8,800	0.890	7,832
3	(110,000*19.20%) = 21,120	5,280	0.840	4,435
4	(110,000*11.52%) = 12,672	3,168	0.792	2,509
5	(110,000*11.52%) = 12,672	3,168	0.747	2,366
6	(110,000*5.76%) = 6,336	1,584	0.705	1,117
		Total present value of tax savings		23,446

• e) Calculation of Tax savings on depreciation on 7 year asset (Amount in $)

Years	MACRS Depreciation (i)	Tax savings on depreciation [(ii) = (i)*25%]	PVF@6% (iii)	Present value of tax savings [(ii)*(iii)]
1	(410,000*14.92%) = 61,172	15,293	0.943	14,421
2	(410,000*24.49%) = 100,409	25,102	0.890	22,341
3	(410,000*17.49%) = 71,709	17,927	0.840	15,059
4	(410,000*12.49%) = 51,209	12,802	0.792	10,139
5	(410,000*8.93%) = 36,613	9,153	0.747	6,837
6	(410,000*8.92%) = 36,572	9,143	0.705	6,446
7	(410,000*8.93%) = 36,613	9,153	0.665	6.087
8	(410,000*4.46%) = 18,286	4,572	0.627	2,866
		Total present value of tax savings		21,314