Question

Falcon, Inc. has the following assets in service at the end of 2018:

Asset	Cost	Recovery Period	Date placed in service
Building	1,000,000	Commercial RE	March 2015
Land	200,000	Commercial RE	March 2015
Furniture and Fixtures	15,000	7	June 2015
Manufacturing Equipment	80,000	7	April 2016
Manufacturing Equipment	219,000	7	January 2018
Transportation Equipment	795,000	5	August 2018
Office Equipment	70,000	7	December 2018

In 2018 Falcon has taxable income of $10,000,000.

Falcon did not utilize a §179 deduction or bonus depreciation prior to 2018. They would like to take the §179 deduction this year.

All assets purchased in 2018 are brand new.

2a: Calculate the most beneficial cost recovery for Falcon, Inc. for 2018. Please note that you completed this problem under 2017 tax law during Chapter 10 in-class problems.

2b: If the transportation equipment was instead purchased for $2,100,000, what would be the most beneficial cost recovery for 2018?

Answer 1

Most Beneficial cost recovery means the optimum way through which we can recover our costs. Alternatively,it can be said as utlilization of coists efficiently and effectively.

As land is not a depreciable asset, therefore, it can be said that recovery of costs is not possible in the case of land and it is specified that the assets purchased in 2018 are new, therefore , recovery of costs will firstly be applied in them.

Total Taxable income: 10000000

Statement showing computattion of recovery of costsL

Particulars
Total taxable Income	1000000
Less: transportation equipment(795000*5/12)	331250
Less: Depreciation expense	(179)
Less: Manufacturing Equipment	(219000)
less: Manufacturing Equipment:	(80000)
Less: office equipment	(70000)
Amount Left	299571
Less: recovery of building	299571
Amount left	nil

As transportation equipment is utilized in  this month for 5 month,therefore, depreciation will be utilized for 5months only.Moroever, it is the highest amount of investment made in 2018. we would like to choose it first for cost recovery.

As we can see in the above case, total recovery of costs which is utilized is Rs.1000000. hence, we can say that this is the best and the optimum way in which this amount is utilized.

(b) If transportation equipment was purchased for Rs. 2100000 , then, Rs(21,00,000*5/12) which is Rs. 875000 would be utilized and the amount which is left for recovery of building will gradually decrease. the calcul;ation would be:

Particulars	Amount
Total Taxable Income	1000000
less:Transportation Equipment(2100000*5/12)	(875000)
Less: depreciation expense	(175)
Less; Furniture and Fixture	(15000)
Less; Office Equipment(70000*1/12)	(5833.33)
Less: Building	(103991.67)
Amount left	nil

In this way, the full amount is utilized . Building is considered in the last as it entails huge investment and it is purchased in March 2015, therefore, a large part of it would be recovered in the initial years.

All asset purchased in April 2018 are divided on the basis of its uage and recovered accordingly.

Cost recovery is a method used as ameasure to recover our expenses, but sometimes, fixed assets are also recovered.