Help! I need assistance trying to find the solution with this problem and need detailed explanations...
Help! I need assistance trying to find the solution with this problem and need detailed explanations so I can better understand it. I would greatly appreciate it.
Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $420,000 on May 20, 2019. Lori expects the taxable income derived from her business (without regard to the amount expensed under § 179) to be about $550,000. Lori has determined she should elect immediate § 179 expensing in the amount of $520,000, but she doesn’t know which asset she should completely expense under § 179. She does not claim any available additional first-year depreciation.
a. Determine Lori’s total deduction if the § 179 expense is first taken with respect to the 5-year class asset.
b. Determine Lori’s total deduction if the § 179 expense is first taken with respect to the 7-year class asset.
c. What is your advice to Lori?
d. Assume that Lori is in the 24% marginal tax bracket and that she elects § 179 on the 7-year asset. Determine the present value of the tax savings from the cost recovery deductions for both assets.
e. Assume the same facts as in part (d), except that Lori decides not to use § 179 on either asset. Determine the present value of the tax savings under this choice.
In addition, determine which option Lori should choose.
Note: please provide answers and explanations on Word or Excel format as written responses are hard to read.
Homework Answers
Answer a. Cost recovery deduction if the 179 expense if taken for 5 year class asset
- Balance deduction for 7 year class asset = 520000 - 5 year asset class value =520000 - 200000=320000
- balance of 7 year asset class asset after 179 deduction = 420000 - balance =420000-320000=100000
- 7 year asset class deduction for each year = 100000/7 =14286 (approx)
- Total deduction available for current year = 520000 +14286 =$ 534286
Answer b. Cost recovery deduction if the 179 expense if taken for 7 year class asset
- Balane 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 +20000 =$ 540000
Answer c. Advise to lory -------- the best advice to e given to Lori is to move towards higher deduction so that it would result in further deductions as shown below-
option b - section 179 on the 7 year asset. It would result her an additional deduction of (540000-534286=) $ 5714.
Answer d - the present value of the tax savings from the cost recovery deductions for both assets.
please refer to the excel table below -
- tax deductions/cuttings = 5 year asset + 7 year asset class
- tax savings = tax deductions * 24 percnt
- present value/ PV = tax savings * PVF
| year | 5Year Asset Class | 7 Year Asset Class | Total cuttings/deductions | Tax savings - 24 percnt[GIVEN] | PVF | PV |
| 1 | 120000 | 420000 | 540000 | 129600 | 1.0000 | 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 | 0.6551 | 0 | |
| 146490.8237 |
Answer e - the present value of the tax savings from the cost recovery deductions for both assets, not using 179 expense for either of the assets.
please refer to the excel table below -
- tax deductions/cuttings = 5 year asset + 7 year asset class
- tax savings = tax deductions * 24 percnt
- present value/ PV = tax savings * PVF
| year | 5Year Asset Class | 7 Year Asset Class | Total cuttings/deductions | Tax savings - 24 percnt[GIVEN] | PVF | PV |
| 1 | 40000 | 60018 | 100018 | 24004.32 | 1.0000 | 24004.32000 |
| 2 | 64000 | 102858 | 166858 | 40045.92 | 0.9434 | 37779.32093 |
| 3 | 38400 | 73458 | 111858 | 26845.92 | 0.8900 | 23892.86880 |
| 4 | 23040 | 52458 | 75498 | 18119.52 | 0.8396 | 15213.14899 |
| 5 | 23040 | 37506 | 60546 | 14531.04 | 0.7921 | 11510.03678 |
| 6 | 11520 | 37464 | 48984 | 11756.16 | 0.7473 | 8785.37837 |
| 7 | 37506 | 37506 | 9001.44 | 0.7050 | 6346.01520 | |
| 8 | 18732 | 18732 | 4495.68 | 0.6551 | 2945.11997 | |
| 130476.20904 |
- higher tax savings would be beneficial. so it recommended to go with option d as it has savings of = 146490.82 - 130476.20 = 16014.61
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