Question

Problem 1. MACRS & Bonus Depreciation. “MMMM That’s Good, Inc.” (or MTG) owns a successful chain of over 150 casual dining restaurants nationwide. Please calculate the tax depreciation expense for 2018 for all of the assets listed below (which constitute all the new assets purchased or placed into service by MTG in 2018): (i) first using just MACRS AND then (ii) using Bonus Depreciation and MACRS.

(i) MTG purchases a building for a new restaurant on June 20, 2018 for $750,000. The land is worth $300,000. On September 15, 2018, MTG purchases new ovens/stoves, prep lines, refrigerators, and a dish washing machine (collectively the “Kitchen Equipment”) at a cost of $150,000. The restaurant is opened for business on September 30, 2018.

(ii) MTG updates its accounting and inventory management systems for 2015 by purchasing new computer hardware at a cost of $4,500 per store (total cost of $675,000). The computer equipment was all purchased on December 15, 2017 and placed into service on January 5, 2018.

(iii) In order to implement pilot testing for a new menu line at select locations, on December 3, 2018, MTG makes a bulk purchase of smoker machines for 30 of its restaurants at a cost of $25,000 each or a total cost of $750,000, and immediately installs the machines and begins use.

Problem 2.

IRC Section 179 & Elections. Assume MTG’s 179 deduction is not limited in 2018, but applying cost recovery using bonus depreciation pushes MTG into a tax loss and so management is looking to limit its total cost recovery to approximately $550,000. Please describe how you might utilize IRC section 179, bonus depreciation elections, & MACRS depreciation to achieve a total deduction for all cost recovery on new assets of $550,000 and then perform the calculation.

Problem 3.

Dispositions. Returning to the facts of Problem 1, if after the pilot testing MTG decided to sell all of the smoker machines on August 10, 2019 for $400,000, what would be the tax consequences including the amount and nature of any gain or loss?

Answer 1

1	MARCS
	Particulars	Purchase date	Usage start date	Cost	Useful life estimated as per MARCS mode	Method		Mid month Depreciation	Mid quarter depreciation
	Building	20-06-2018	30-09-2018	750000	39	Straight line Method		5609	7212
	Land	20-06-2018	30-09-2018	300000
	Kitchen Equipments	15-09-2018	30-09-2018	150000	5	200% declining balance method		17500	22500
	Computer equipment	15-12-2017	05-01-2018	675000	5	200% declining balance method		258750	236250
	Smoker machines	03-12-2018	03-12-2018	750000	5	200% declining balance method		12500	37500
								294359	303462
	Selection of period method:
	Mid-month	Only applies to buildings . Half a month's worth of depreciation is recognised for the month asset is put to service
	Mid-quarter	It gives slightly over one month's worth of depreciation for the quarter in which asset is purchased
	Half-year	Half years' depreciation is received no maater how long asset is used
	Thus, as per tax benefit point of view for the company half-year depreciation is preferable
	Assuming tax rate	25%
	Tax depreciation	81153.75
	Bonus Dpreciation method and MARCS
	Particulars	Purchase date	Usage start date	Cost	Useful life estimated as per MARCS mode	Method	Depreciation method	Half year depreciation
	Building	20-06-2018	30-09-2018	750000	39	Straight line Method	MARCS	9615
	Land	20-06-2018	30-09-2018	300000
	Kitchen Equipments	15-09-2018	30-09-2018	150000	5	200% declining balance method	Bonus depreciation	150000
	Computer equipment	15-12-2017	05-01-2018	675000	5	200% declining balance method	Bonus depreciation	675000
	Smoker machines	03-12-2018	03-12-2018	750000	5	200% declining balance method	Bonus depreciation	750000
								1584615
	For building MARCS depreciation will apply as it has useful life of more than 20 years
	Bonus depreciation under tax cuts and Jobs Act is a claim to expense out 100% (currently) of the aqcuisition amount of the asset in the year it is acquired
	Assuming tax rate	25%
	Tax depreciation	396153.75
2	Section 179 gives more flexibility on when we shall get our deduction while bony depreciation apply to more spreading per year
	While section 179 allows businesses to expense a cost immedicately while bonus depreciation allows to recover cost over time
	In other words section 179 deduction is taken only if there are taxable profits first to reduce the cost of property upto taxable profit and then bonu depreciation is taken after to decrease the remaining cost
	Particulars	Purchase date	Usage start date	Cost	Useful life estimated as per MARCS mode	Method	Depreciation method	Half year depreciation
	Building	20-06-2018	30-09-2018	750000	39	Straight line Method	MARCS	9615
	Land	20-06-2018	30-09-2018	300000
	Kitchen Equipments	15-09-2018	30-09-2018	150000	5	200% declining balance method	Section 179	52000
	Computer equipment	15-12-2017	05-01-2018	675000	5	200% declining balance method	Section 179	236000
	Smoker machines	03-12-2018	03-12-2018	750000	5	200% declining balance method	Section 179	262000
								559615
	In the year 2018 the company has claimed propoertionate deduction u/s 179 whereas in the following year the company can claim bonus depreciation of the balance cost to take maximum advantage
	Particulars			Cost
	Smoker machines			750000
	Depreciation for 2018			150000
	Op 2019			600000
	Depreciation 2019			160000
	Balance Aug 2019			440000
	Sale price			400000
	Gain/(loss)			-40000