Lori, who is single, purchased 5-year class property for $200,000 and 7-year cla

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 $

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 $

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

larger. 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 $ .

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 $ .

Explanation / Answer

a 5-year class property Immediate expense deduction under § 179 200000 7-year class property Immediate expense deduction under § 179 (500000-200000) 300000 MACRS cost recovery [($410,000 – $300,000) × .1429] 15719 Total Deduction 515719 b 7-year class property Immediate expense deduction under § 179 410000 5-year class property Immediate expense deduction under § 179 90000 90000*.2 18000 Total Deduction 518000 The deduction for the year would be $2,218 ($518,000 – $515,719) larger if§ 179 expense is first allocated to the 7-year class property (i.e., the longerlived asset).

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