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 $

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Under the modified accelerated cost recovery system (MACRS), the cost of an asset is recovered over a predetermined period that is generally shorter than the useful life of the asset or the period the asset is used to produce income. MACRS provides separate cost recovery tables for realty (real property) and personalty (personal property). Write-offs are not available for land because it does not have a determinable useful life. Cost recovery allowances for real property, other than land, are based on recovery lives specified in the law. Section 179 (Election to Expense Certain Depreciable Business Assets) permits the taxpayer to elect to write off up to part of the acquisition cost of tangible personal property used in a trade or business.

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 $

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Correct

c. If § 179 expense is first allocated to the seven-year class property, the deduction for the year would be $ larger.

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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 $.

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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 $.

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Incorrect

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Partially correct

Answer 1