Tom has a successful business with $100,000 of taxable income before the electio

Question

Tom has a successful business with $100,000 of taxable income before the election to expense in 2017. He purchases one new asset in 2017, a new machine which is 7-year MACRS property and costs $25,000. You are Tom's tax advisor. Complete the memorandum regarding the options you would advise for Tom and the treatment of this machine for tax purposes in 2017.

Memorandum

To: Tom Businessman
From: Tax Advisor

One option is to utilize Section 179 which, by election, would allow you to expense $

of the cost of the machine in 2017. If the Section 179 election is not made and assuming no bonus depreciation is taken, you would be allowed a MACRS deduction of $.

Explanation / Answer

The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system in the United States. Under this system, the capitalized cost (basis) of tangible property is recovered over a specified life by annual deductions for depreciation.

To Tom.

Since you have purcahsed property for US$ 25000 AND LIE IS 7 YEARS , assuming no salvage value at the end of 7 year , I advise you to depreciate macine by 3571.42 US$ ( 25000/7) , so that at the expiry of 7 years you will be in position to replace machine.

As per law you will avail depreciation expenses and depreciation will be allowed as deduction and no need to pay taxes on depreciation amount.

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