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 |
Please Up-vote Thank You !!!
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