Dennis Harding is considering acquiring a new automobile that he will use 100% for business in the subsequent year. The purchase price of the automobile would be $64,500. If Dennis leased the car for five years, the lease payments would be $875 per month. Dennis will acquire the car on January 1, 2020. It will be his only business asset purchase of 2020. The inclusion dollar amounts from the IRS table for the next five years are $63, $140, $208, $251, and $289.

Dennis wants to know the effect on his adjusted gross income of purchasing versus leasing the car for the next five years. He does not claim any available additional first-year depreciation.

Click here to access the limits for certain automobiles. Click here to access the depreciation table to use for this problem.

If required, round your answers to the nearest dollar.

Complete the letter to Dennis.

Young, Nellen, Raabe, Hoffman, & Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040

December 20, 2019

Mr. Dennis Harding 150 Avenue I Memphis, TN 38112

Dear Mr. Harding:

I am writing in response to your request concerning the tax consequences of purchasing versus leasing an automobile. Our calculations are based on the data you provided in our telephone conversation.

If the automobile is purchased, the total cost recovery deductions for the five years will be $ ( ). If the automobile is leased, lease payment deductions will total ( ). In addition, you also must include a total ( ) in your gross income.

If you need additional information or clarification of our calculations, please contact us.

Sincerely yours,

Ishita J. Jones, CPA Partner

Complete the memo for the tax files.

TAX FILE MEMORANDUM

DATE: December 20, 2019

FROM: Ishita J. Jones

SUBJECT: Dennis Harding: Calculation of lease versus purchase

Facts Dennis Harding is considering purchasing or leasing an automobile on January 1, 2020. The purchase price of the automobile is $64,500. The lease payments for five years would be $875 per month. Dennis wants to know the effect on his adjusted gross income for purchasing versus leasing the automobile for five years.

Calculations
Purchase: Cost recovery deductions
	2020
	2021
	2022
	2023
	2024
	Total cost recovery deductions

If leased:
Total lease payments
Inclusion dollar amounts