Mr. S paid $16,600 cash for a tangible asset for use in his new business. The asset

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Mr. S paid $16,600 cash for a tangible asset for use in his new business. The asset is three-year recovery property. Before consideration of any cost recovery deduction, the business generated a net loss this year (year 0). However, Mr. and Mrs. S have other sources of income, so they can deduct the entire business loss on their individual tax return. Mr. S has two choices with respect to the new asset. He can capitalize the cost and depreciate it under MACRS. Alternatively, he can elect to expense the cost under Section 179. Because his business generates no taxable income, the expense would be nondeductible. However, it would carry forward into future years. Mr. S predicts that the business will operate at a loss for next year (year 1) but should generate at least $20,000 income the following year (year 2). Consequently, he can deduct the Section 179 expense carryforward in that year. If Mr. and Mrs. S’s marginal tax rate is 25 percent and they use a 7 percent discount rate to compute NPV, should Mr. S elect to expense the cost of the new business asset? Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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