Question

Frank operates a construction business in Dallas, Texas.  On May 1, 2020, 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 2020, Frank purchased the following business property: equipment for $100,000, light-duty truck for $50,000, and office furniture for $50,000.  Please calculate Frank’s 2020 depreciation deductions.  You can ignore bonus depreciation and Section 179.  Be sure to explain your calculations fully. 

What income would Frank report if he decided to sell the warehouse and equipment on January 1, 2022 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).  Be sure to fully explain your answer.

Answer 1

Reduction for the year 2020 is:

	(a)		(b)	(a) X (b)
Property	MACRS Basis	Recovery period	Rate	MACRS Reduction
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

2021

	(a)		(b)	(a) X (b)
Property	MACRS Basis	Recovery period	Reduction Rate	MACRS Reduction
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
Recovery				$   85,965.00

2022

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
Recovery						$     6,183.33

P&L 

Particulars	Equipment	Truck	Furniture	Land and Building
Cost	$          100,000	$            50,000	$            50,000	$       1,500,000
low: reduction
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
low: adjusted basis	$ 66,420.00	$      27,075.00	$ 33,210.00	$ 1,457,241.67
profiton sale of asset	$ 28,580.00	$      20,425.00	$ 14,290.00	$      42,758.33
Total profit	$ 106,053.33