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. a. Determine Lori’s total cost recovery deduction if the § 179 expense is first taken with respect to the 5-year class asset. b. Determine Lori’s total cost recovery 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 25% marginal tax bracket and that she uses § 179 on the 7-year asset. Determine the present value of the tax savings from the depre- ciation deductions for both assets. See Appendix G for present value factors, 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. What is the present value of the tax savings generated by using the § 179 deduction on the 7-year asset?

Explanation / Answer

a) Calculation of total cost recovery if the § 179 expense is first taken for 5 year class asset.

b) Calculation of total cost recovery if the § 179 expense is first taken for 7 year class asset.

c) The deduction for the year would be $6,281 ($522,000-$515,719) larger if § 179 deduction is first allocated to the 7 year class property (i.e. longer lived asset).

d) Calculation of Tax savings on depreciation (Amount in $)

0.747

e) Calculation of Tax savings on depreciation on 7 year asset (Amount in $)

0.747

5 year class property Immediate expense deduction under § 179 $200,000 7 year class property Immediate expense deduction under § 179 (500,000-200,000) $300,000 MACRS cost recovery (410,000-300,000)*0.1429 $15,719 Total Deduction $515,719

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