CH. 2 Q.31

Karane Enterprises, a calendar-year manufacturer based in College Station, Texas, began business in 2019. In the process of setting up the business, Karane has acquired various types of assets. Below is a list of assets acquired during 2019:

Asset	Cost		Date Placed in Service
Office furniture	$	150,000	02/03/2019
Machinery		1,560,000	07/22/2019
Used delivery truck*		40,000	08/17/2019

*Not considered a luxury automobile.

During 2019, Karane was very successful (and had no 179 limitations) and decided to acquire more assets in 2020 to increase its production capacity. These are the assets acquired during 2020:

Asset	Cost		Date Placed in Service
Computers & info. system	$	400,000	03/31/2020
Luxury auto		80,000	05/26/2020
Assembly equipment		1,200,000	08/15/2020
Storage building		700,000	11/13/2020

Used 100% for business purposes.

Karane generated taxable income in 2020 of $1,732,500 for purposes of computing the 179 expense limitation. (Use MACRS Table 1, Table 2, Table 3, Table 4, Table 5, and Exhibit 10-10.) (Leave no answer blank. Enter zero if applicable. Input all the values as positive numbers.)

REQUIRED

a. Compute the maximum 2019 depreciation deductions, including 179 expense (ignoring bonus depreciation).

b. Compute the maximum 2020 depreciation deductions, including 179 expense (ignoring bonus depreciation).

c. Compute the maximum 2020 depreciation deductions, including 179 expense, but now assume that Karane would like to take bonus depreciation.

d. Now assume that during 2020, Karane decides to buy a competitors assets for a purchase price of $1,350,000. Compute the maximum 2020 cost recovery, including 179 expense and bonus depreciation. Karane purchased the following assets for the lump-sum purchase price: (Round your final answers to the nearest whole dollar amount.)

Asset	Cost		Date Placed in Service
Inventory	$	220,000	09/15/2020
Office furniture		230,000	09/15/2020
Machinery		250,000	09/15/2020
Patent		198,000	09/15/2020
Goodwill		2,000	09/15/2020
Building		430,000	09/15/2020
Land		20,000	09/15/2020

Table 1 MACRS Half-Year Convention 20-Year Depreciation Rate for Recovery Period 3-Year 5-Year 7-Year 10-Year 15-Year 33.33% 20.00% 14.29% 10.00% 5.00% 44.45 32.00 24.49 18.00 9.50 3.750% Year 1 Year 2 7.219 Year 3 19.20 17.49 14.40 8.55 6.677 14.81 7.41 Year 4 11.52 12.49 11.52 7.70 Year 5 8.93 9.22 11.52 5.76 6.93 6.23 6.177 5.713 5.285 Year 6 8.92 7.37 Year 7 6.55 5.90 4.888 8.93 4.46 Year 8 6.55 5.90 4.522 Year 9 5.91 4.462 Year 10 6.56 6.55 3.28 5.90 4.461 Year 11 5.91 4.462 5.90 Year 12 Year 13 4.461 4.462 5.91 5.90 Year 14 Year 15 5.91 4.461 4.462 4.461 Year 16 2.95 Year 17 4.462 Year 18 4.461 4.462 Year 19 Year 20 4.461 Year 21 2.231 TABLE 2a MACRS Mid-Quarter Convention: For property placed in service during the first quarter Depreciation Rate for Recovery Period 5-Year 7-Year Year 1 35.00% 25.00% Year 2 26.00 21.43 Year 3 15.60 15.31 Year 4 11.01 10.93 Year 5 11.01 8.75 Year 6 1.38 8.74 Year 7 8.75 Year 8 1.09 TABLE 26 MACRS Mid-Quarter Convention: For property placed in service during the second quarter Depreciation Rate for Recovery Period 5-Year 7-Year Year 1 25.00% 17.85% Year 2 30.00 23.47 Year 3 18.00 16.76 Year 4 11.37 11.97 Year 5 11.37 8.87 Year 6 4.26 8.87 Year 7 8.87 Year 8 3.34 TABLE 2c MACRS Mid-Quarter Convention: For property placed in service during the third quarter Depreciation Rate for Recovery Period 5-Year 7-Year Year 1 15.00% 10.71% Year 2 34.00 25.51 Year 3 20.40 18.22 Year 4 12.24 13.02 Year 5 11.30 9.30 Year 6 7.06 8.85 Year 7 8.86 Year 8 5.53 TABLE 20 MACRS-Mid Quarter Convention: For property placed in service during the fourth quarter Depreciation Rate for Recovery Period 5-Year 7-Year Year 1 5.00% 3.57% Year 2 38.00 27.55 Year 3 22.80 19.68 Year 4 13.68 14.06 Year 5 10.94 10.04 Year 6 9.58 8.73 Year 7 8.73 Year 8 7.64 TABLE 3 Residential Rental Property Mid-Month Convention Straight Line-27.5 Years Month Property Placed in Service Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Year 1 3.485% 3.182% 2.879% 2.576% 2.273% 1.970% 1.667% Year 2-9 3.636 3.636 3.636 3.636 3.636 3.636 3.636 Month 8 Month 9 Month 10 Month 11 Month 12 0.758% 0.455% 0.152% 1.364% 1.061% 3.636 3.636 3.636 3.636 3.636 Year 10 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636 1 Year 11 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637 Year 12 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636 Year 13 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637 Year 14 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636 Year 15 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637 Year 16 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636 Year 17 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 Year 18 Year 19 3.637 3.636 3.636 3.637 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 Year 20 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.637 3.636 3.637 Year 21 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636 Year 22 Year 23 Year 24 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636 Year 25 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.636 3.636 3.636 3.636 3.636 3.636 Year 26 Year 27 3.636 3.636 3.636 3.636 3.636 3.636 3.637 3.637 3.637 3.637 3.637 3.637 Year 28 1.97 2.273 2.576 2.879 3.182 3.485 3.636 3.636 3.636 3.636 3.636 3.636 0.758 Year 29 0.152 0.455 1.061 1.364 1.667 TABLE 4 Nonresidential Real Property Mid-Month Convention Straight Line-31.5 Years (for assets placed in service before May 13, 1993) Month 1 Month 2 Month 3 Month 4 Month 8 Month 9 Month 10 Month 11 Year 1 3.042% 2.778% 2.513% 2.249% Month Property Placed in Service Month 5 Month 6 Month 7 1.984% 1.720% 1.455% 3.175 3.175 3.175 3.175 3.174 3.175 1.190% 0.661% 0.397% 0.926% 3.175 Month 12 0.132% 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 Year 2-7 Year 8 3.175 3.174 3.175 3.174 3.175 3.175 3.175 3.175 3.175 Year 9 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 Year 10 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 Year 11 Year 12 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 Year 13 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 Year 14 Year 15 3.174 3.175 3.174 3.174 3.175 3.175 3.175 3.174 3.175 3.175 3.174 3.174 3.175 3.174 3.175 Year 16 3.175 3.174 3.175 3.175 3.174 3.174 3.174 3.175 3.174 Year 17 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 Year 18 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 Year 19 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 Year 20 Year 21 Year 22 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 Year 23 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.115 3.174 3.175 3.174 3.175 3.175 3.175 3.175 3.174 3.175 3.174 3.175 3.174 3.174 Year 24 Year 25 3.174 3.175 3.174 3.175 3.175 3.174 3.174 3.174 3.174 3.175 3.174 3.175 3.174 3.175 3.175 Year 26 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 Year 27 Year 28 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 Year 29 Year 30 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 3.174 3.175 Year 31 Year 32 1.720 1.984 2.249 2.513 2.778 3.042 3.175 3.174 3.175 3.174 3.175 3.174 Year 33 0.132 0.397 0.661 0.926 1.190 1.455 TABLE 5 Nonresidential Real Property Mid-Month Convention Straight Line-39 Years (for assets placed in service on or after May 13, 1993) Month 1 Month 2 Month 3 Month 4 Month 8 Month 9 Month 10 Month 11 Month 12 Month Property Placed in Service Month 5 Month 6 Month 7 1.605% 1.391% 1.177% 2.564 2.564 2.564 Year 1 2.461% 2.247% 2.033% 1.819% 0.963% 0.749% 0.535% 0.321% 0.107% Year 2-39 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 Year 40 0.107 0.321 0.535 0.749 0.963 1.177 1.391 1.605 1.819 2.033 2.247 2.461 Description $ Office furniture Machinery Delivery truck Total 2019 Cost Recovery Current Total Cost Cost $179 Expense MACRS Basis MACRS Recovery Depreciation Deduction 150,000 $ 0 $ 150,000 $ 21,435 $ 21,435 1,560,000 0 0 0 0 40,000 0 40,000 8,000 8,000 1,750,000 $ 0 $ 190,000 $ 29,435 $ 29,435 $ Description Cost Sec. 179 Expense MACRS Basis Current MACRS Depreciation Total Cost Recovery Deduction 2019 Assets Office furniture $ $ 21,435 $ 150,000 1,560,000 1,000,000 X 150,000 $ 560,000 X 60,000 Machinery Used delivery truck 80,024 X 21,435 1,080,024 8,000 40,000 8,000 X 2020 Assets 22,000 X 290,000 X 10,000 X Computers & Info. System Luxury Auto Assembly Equipment Storage Building 0 X 400,000 80,000 1,200,000 700,000 110,000 x 70,000 X 1,200,000 X 312,000 10,000 240,000 2,000,000 0 X 240,000 X 2,000,000 X 0 0 Total 2020 Cost Recovery $ 4,130,000 $ 3,300,000 $ 2,150,000 371,459 $ 3,671,459 Description Cost Sec. 179 Expense Bonus MACRS Basis Current MACRS Depreciation Total Cost Recovery Deduction 2019 Assets $ Office Furniture Machinery Used Delivery Truck 2020 Assets Computers & Info. System Luxury Auto Assembly Equipment Storage Building O oo oo ooo Total 2020 Cost Recovery $ 0 $ 0 $ 0 $ 0 $ 0 $ Description Cost Sec. 179 Expense Bonus MACRS Basis Current MACRS Depreciation Current Amortization Total Cost Recovery Deduction 2019 Assets Office Furniture $ Machinery Used Delivery Truck OOO 2020 Assets Computers & Info. System Luxury Auto Assembly Equipment Storage Building o o o o Inventory Office Furniture 0 0 Machinery Patent 0 0 Goodwill Building Land 0 0 Totals $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0