Frank operates a construction business in Dallas, Texas. On May 1, 2020, Frank purchased a warehouse for his business. The warehouse cost $1,500,000 ($500,000 for land and $1,000,000 for improvements). In November 2020, Frank purchased the following business property: equipment for $100,000, light-duty truck for $50,000, and office furniture for $50,000. Please calculate Frank’s 2020 depreciation deductions. You can ignore bonus depreciation and Section 179. Be sure to explain your calculations fully.
What income would Frank report if he decided to sell the warehouse and equipment on January 1, 2022 so he could upgrade the business? Assume he could sell the warehouse for $1,500,000 and the equipment for $190,000 ($95,000 for equipment, $47,500 for truck, and $47,500 for office furniture). Be sure to fully explain your answer.
Reduction for the year 2020 is:
| (a) | (b) | (a) X (b) | ||
| Property | MACRS Basis | Recovery period | Rate | MACRS Reduction |
| Equipment | $ 100,000 | 7 year | 3.57% | $ 3,570.00 |
| Truck | $ 50,000 | 5 year | 5.00% | $ 2,500.00 |
| Furniture | $ 50,000 | 7 year | 3.57% | $ 1,785.00 |
| Building | $ 1,000,000 | 39 years | 1.605% | $ 16,050.00 |
| Cost recovery | $ 23,905.00 |
2021
| (a) | (b) | (a) X (b) | ||
| Property | MACRS Basis | Recovery period | Reduction Rate | MACRS Reduction |
| Equipment | $ 100,000 | 7 year | 27.55% | $ 27,550.00 |
| Truck | $ 50,000 | 5 year | 38.00% | $ 19,000.00 |
| Furniture | $ 50,000 | 7 year | 27.55% | $ 13,775.00 |
| Building | $ 1,000,000 | 39 years | 2.564% | $ 25,640.00 |
| Recovery | $ 85,965.00 |
2022
| Property | MACRS Basis | Recovery period | Depreciation Rate | MACRS depreciation | × allowed percent | Allowed depreciation |
| Equipment | $ 100,000 | 7 year | 19.68% | $ 19,680.00 | 0.125 | $ 2,460.00 |
| Truck | $ 50,000 | 5 year | 22.80% | $ 11,400.00 | 0.125 | $ 1,425.00 |
| Furniture | $ 50,000 | 7 year | 19.68% | $ 9,840.00 | 0.125 | $ 1,230.00 |
| Building | $ 1,000,000 | 39 years | 2.564% | $ 25,640.00 | 0.041667 | $ 1,068.33 |
| Recovery | $ 6,183.33 |
P&L
| Particulars | Equipment | Truck | Furniture | Land and Building |
| Cost | $ 100,000 | $ 50,000 | $ 50,000 | $ 1,500,000 |
| low: reduction | ||||
| year 2019 | $ 3,570.00 | $ 2,500.00 | $ 1,785.00 | $ 16,050.00 |
| year 2020 | $ 27,550.00 | $ 19,000.00 | $ 13,775.00 | $ 25,640.00 |
| year 2021 | $ 2,460.00 | $ 1,425.00 | $ 1,230.00 | $ 1,068.33 |
| Adjusted basis | $ 66,420.00 | $ 27,075.00 | $ 33,210.00 | $ 1,457,241.67 |
| Selling price | $ 95,000 | $ 47,500 | $ 47,500 | $ 1,500,000 |
| low: adjusted basis | $ 66,420.00 | $ 27,075.00 | $ 33,210.00 | $ 1,457,241.67 |
| profiton sale of asset | $ 28,580.00 | $ 20,425.00 | $ 14,290.00 | $ 42,758.33 |
| Total profit | $ 106,053.33 |
What income would Frank report if he decided to sell the warehouse and equipment on January 1, 2022 so he could upgrade the business?