Question

De 10.7 Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $420,000 on May 20, 2018. Lori expects the taxable income Derived from her business (without regard to the amount expensed under $ 179) to be about $550,000. Lori has determined she should elect immediate 8 179 expens- ing in the amount of $520,000, but she doesn't know which asset she should com- pletely expense under $ 179. She does not claim any available additional first-year depreciation. 2. Determine Lori's total deduction if the $ 179 expense is first taken with respect to the 5-year class asset. b. Determine Lori's total deduction if the $ 179 expense is first taken with respect to the 7-year class asset. c. What is your advice to Lori? d. Assume that Lori is in the 24% marginal tax bracket and that she uses $ 179 on the 7-year asset. Determine the present value of the tax savings from the depreciation deductions for both assets. See Appendix F for present value fac- tors, and assume a 6% discount rate. e. Assume the same facts as in part (d), except that Lori decides not to use § 179 on either asset. Determine the present value of the tax savings under this choice. In addition, determine which option Lori should choose.

Answer 1

Answer :

(a). Cost recovery deduction if the 179 expense if taken for 5 year class asset

Balance deduction for 7 year class asset = 520000 - 5 year asset class value

= 520000 - 200000

= 320000

7 year asset class balance after 179 deduction = 420000 - balance

= 420000 - 320000

= 100000

7 year asset class deduction for each year = 100000/7

= 14286 (approx)

Total deduction available for current year = 520000 + 14286

= $534286

(b). Cost recovery deduction if the 179 expense if taken for 7 year class asset

Balance deduction for 5 year class asset under 179 = 520000 - 7 year asset class value

= 520000 - 420000

= 100000

5 year asset class balance after 179 deduction

= 200000 - 100000

= 100000

7 year asset class deduction for each year = 100000/5

= 20000

Total deduction available for current year = 520000 + 2000

= $540000

(c) Advise to Lory

My advise to Lori is to move towards bigger deduction to use option b - take the most section 179 on the 7 year asset. It would result her an additional deduction of (540000-534286)= $5714

(d). PV of Tax Saving

Year	5 Year Asset class	7 Year Asset class	Total deduction	Tax Saving @24%	PVF	PV
1	120000	420000	540000	129600	1	129600
2	32000	0	32000	7680	0.9434	7245.312
3	19200	0	19200	4608	0.8900	4101.12
4	11520	0	11520	2764.8	0.8396	2321.32608
5	11520	0	11520	2764.8	0.7921	2189.99808
6	5760	0	5760	1382.4	0.7473	1033.06752
7		0	0	0	0.7050	0
8		0	0	0	0.6651	0
						146490.82

(e). PV of Tax Saving in case no 179

1	40000	60018	100018	24004.32	1	24004.32
2	64000	102858	166858	40045.92	0.9434	37779.3209
3	38400	73458	111858	26845.92	0.8900	23892.8688
4	23040	52458	75498	18119.52	0.8396	15213.149
5	23040	37506	60546	14531.04	0.7921	11510.0368
6	11520	37464	48984	11756.16	0.7473	8785.37837
7		37506	37506	9001.44	0.7050	6346.0152
8		18732	18732	4495.68	0.6651	2990.07677
						130521.17
It's better to opt option D as it is resulting additional saving of $15996.66

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