A startup is considering buying some vehicles to help with their business. They

Question

A startup is considering buying some vehicles to help with their business. They want to know how much depreciation they will be able to claim as a deduction on their taxes. (Hint: You can download the actual tax form for computing this from the Canada Revenue Agency: Google capital cost allowance form." It has all the instructions for how to do this right on the form!) (a) Suppose they started 2018 with no prior capital assets. If they buy a Honda Accord for $25,000 what will their capital cost allowance be in the year 2018? What will their undepreciated capital cost be at the end of the tax year? (b) Suppose that in 2019 the company sells the Accord for $20,000 and buys a Ford truck for $25,000. What are the capital cost allowance and the undepreciated capital cost at the end of 2019? (c) Now suppose that the company sells the truck in 2020 for $12,000. What will the capital cost allowance and undepreciated capital cost be in 2020? (d) If the company doesn't buy any new capital in 2021, will they still be able to claim a capital cost allowance in their 2021 tax return? Explain why or why not.

Explanation / Answer

Gross income is $150,000. We will assume it as the Adjusted Gross income. They want to claim standard deduction. Standard deduction for married filing joint is $12,600. They are eligible to claim 2 personal exemptions. Personal exemption for each person is $4,000. So total personal exemption amount is $8,000. Taxable income for 2015 is $150,000 - $12,600 - $8,000 = $129,400.

Using tax table of 2015 for married filing joint status, they fall into tax bracket of $74,901 - $151,200. The tax amount will be $10,312.50 plus 25% of the amount over $74,900. That will be $10,312.50 + 25% * ($129,400 - $74,900) = $23,937.50

2. If they buy a house and have mortgage, in such case as home owners, they will be able to claim real estate taxes and mortgage interest. Real estate taxes are assumed at 12,000 per year. Mortgage interest at 3% and additional itemized deductions $10,000. So Total itemized deductions will be $22,000 plus mortgage interest whatever is paid. As seen above Standard deduction for Married filing joint status is $12,600. Itemized deductions are more than that. So in this situation, on their tax return, they will be claiming the itemized deduction. The tax return will show Adjusted Gross Income – Itemized deductions – Personal exemptions. So the only change will be instead of standard deduction, itemized deductions will be used to arrive at taxable income.

3. If the taxpayers buy a house, the minimum itemized deductions that can be claimed is $32,000. In addition to that any mortgage interest paid can also be claimed as itemized deduction. The tax savings by claiming itemized deduction is

25% of ($32,000 + $x - $12,600) = $x

=$4,850 + $0.25x = $x

=$4,850 = $x - $0.25x

=$x = $4,850/0.75 = $6,467.

So, if the taxpayers take a mortgage amount that makes them pay annual interest of $6,467, then by claiming the itemized deductions tax savings achieved will also be $6,467.

The mortgage interest rate is given at 3%. The amount of mortgage that will enable to generate this tax savings depends on various factors. It cannot be calculated correctly with the limited information available. However, the taxpayers should plan for a mortgage which will allow them to pay annual interest of $6,467.

4. As there is no clear information of the loan amount and loan term, the amount of mortgage payments cannot be calculated. Mortgage payment will include principal, interest, taxes, insurance. With the limited information we cannot calculate accurately how much income tax savings will allow them to pay in mortgage payments.

5. From the income tax point view, there is no specific good time to purchase a house. Income tax return deals with the after the fact effects like what was the amount of property tax paid during the year; what was the mortgage interest paid or points paid or mortgage insurance paid; etc. But in general, the good time to purchase is in the month of October. You get a good discount during this month. Or it can be during the Spring season.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.