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 $ 52,500 V. In addition, you also must include a total 951 in your gross income. If you need additional information or clarification of our calculations, please contact us. Sincerely yours, Ishita J. Jones, CPA Partner Feedback 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 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 9,675 x 2021 16,448 x 2022 11,513 x 2023 10,746 x 2024 10,746 x Total cost recovery deductions 15,060 x If leased: Total lease payments $ 52,500 A Inclusion dollar amounts 951 Exhibit 8.3 MACRS Accelerated Depreciation for Personal Property Assuming Half-Year Convention (Percentage Rates) For Property Placed in Service after December 31, 1986 Recovery 3-Year 5-Year 7-Year 10-Year Year (200% DB) (200% DB) (200% DB) (200% DB) 1 33.33 20.00 14.29 10.00 2 44.45 32.00 24.49 18.00 3 14.81 19.20 17.49 14.40 4 7.41 11.52* 12.49 11.52 5 11.52 8.93* 9.22 6 5.76 8.92 7.37 7 8.93 6.55" 8 4.46 6.55 9 6.56 10 6.55 11 3.28 12 13 14 15 16 17 18 19 20 21 15-Year (150% DB) 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95 20-Year (150% DB) 3.750 7.219 6.677 6.177 5.713 5.285 4.888 4.522 4.462* 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 2.231 *Switchover to straight-line depreciation. Exhibit 8.4 MACRS Accelerated Depreciation for Personal Property Assuming Mid-Quarter Convention (Percentage Rates) For Property Placed in Service after December 31, 1986 (Partial Table * ) 3-Year Recovery Year First Quarter Second Quarter Fourth Quarter Third Quarter 1 58.33 41.67 25.00 8.33 2 27.78 38.89 50.00 61.11 5-Year Recovery Year First Quarter Second Quarter Fourth Quarter Third Quarter 1 35.00 25.00 15.00 5.00 2 26.00 30.00 34.00 38.00 7-Year Recovery Year First Quarter Second Quarter Fourth Quarter Third Quarter 1 25.00 17.85 10.71 3.57 2 21.43 23.47 25.51 27.55 Exhibit 8.5 MACRS Straight-Line Depreciation for Personal Property Assuming Half-Year Convention* For Property Placed in Service after December 31, 1986 Other Recovery Years Last Recovery Year MACRS Class Years % Year % % First Recovery Year 3-year 16.67 2-3 33.33 4 16.67 5-year 10.00 2-5 20.00 6 10.00 7-year 7.14 2-7 14.29 8 7.14 10-year 5.00 2-10 10.00 11 5.00 15-year 3.33 2-15 6.67 16 3.33 20-year 2.50 2-20 5.00 21 2.50 Note: The last two rows of this table are used for qualified improvement property (15-year normal MACRS; 20-year ADS). Exhibit 8.6 Alternative Minimum Tax: 150% Declining-Balance Assuming Half- Year Convention (Percentage Rates) For Property Placed in Service after December 31, 1986 (Partial Table*) Recovery 3-Year 5-Year 7-Year 9.5-Year 10-Year Year 150% 150% 150% 150% 150% 12-Year 150% 1 2 25.00 37.50 25.00** 12.50 3 15.00 25.50 17.85 16.66** 16.66 8.33 10.71 19.13 15.03 12.25** 12.25 12.25 12.25 6.13 4 7.89 14.54 12.25 10.31 9.17** 9.17 9.17 9.17 7.50 13.88 11.79 10.02 8.74** 5 6 7 6.25 11.72 10.25 8.97 7.85 7.33** 7.33 7.33 7.33 7.33 7.32 7.33 3.66 8.74 8.74 8.74 8.74 8.74 4.37 9.17 8 9 10 11 12 13 9.16 *The figures in this table are taken from the official table that appears in Rev.Proc. 8757, 1987-2 C.B.687. Because of its length, the complete table is not presented. **Switchover to straight-line depreciation. Exhibit 8.7 ADS Straight-Line for Personal Property Assuming Half-Year Convention (Percentage Rates) For Property Placed in Service after December 31, 1986 (Partial Table) * Recovery Year 5-Year Class 10-Year Class 12-Year Class 1 10.00 5.00 4.17 2 20.00 10.00 8.33 3 20.00 10.00 8.33 4 20.00 10.00 8.33 5 20.00 10.00 8.33 6 10.00 10.00 8.33 7 10.00 8.34 8 10.00 8.33 9 10.00 8.34 10 10.00 8.33 11 5.00 8.34 12 8.33 13 4.17 Exhibit 8.8 MACRS Straight-Line Depreciation for Real Property Assuming Mid-Month Convention* (Percentage Rates) For Property Placed in Service after December 31, 1986: 27.5-Year Residential Real Property Recovery The Applicable Percentage Is (Use the Column for the Month in the First Year the Property is placed in Service): Year(s) 1 2 3 4 5 6 7 8 9 10 11 12 1 3.485 3.182 2.879 2.576 2.273 1.970 1.667 1.364 1.061 0.758 0.455 0.152 2-18 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 3.636 19-27 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 3.637 28 1.970 2.273 2.576 2.879 3.182 3.485 3.636 3.636 3.636 3.636 3.636 3.636 29 0.000 0.000 0.000 0.000 0.000 0.000 0.152 0.455 0.758 1.061 1.364 1.667 For Property Placed in Service after December 31, 1986, and before May 13, 1993: 31.5-Year Nonresidential Real Property Recovery The Applicable Percentage Is (Use the Column for the Month in the First Year the Property Is Placed in Service): Year(s) 1 2 3 4 5 6 7 8 9 10 11 12 1 3.042 2.778 2.513 2.249 1.984 1.720 1.455 1.190 0.926 0.661 0.397 0.132 2-19 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.175 3.174 3.174 3.174 3.174 3.174 3.174 3.174 3.174 3.174 3.174 3.174 3.174 32 1.720 1.984 2.249 2.513 2.778 3.042 3.175 3.175 3.175 3.175 3.175 3.175 33 0.000 0.000 0.000 0.000 0.000 0.000 0.132 0.397 0.661 0.926 1.190 1.455 20-31 For Property Placed in Service after May 12, 1993: 39-Year Nonresidential Real Property Recovery The Applicable Percentage Is (Use the Column for the Month in the First Year the Property Is Placed in Service): Year(s) s 1 2 3 4 5 6 7 8 9 10 11 12 1 2.461 2.247 2.033 1.819 1.605 1.391 1.177 0.963 0.749 0.535 0.321 0.107 2-39 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 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 *The official tables contain a separate row for each year. For ease of presentation, certain years are grouped in these tables. In some instances, this will produce a difference of .001 for the last digit when compared with the official tables. Exhibit 8.9 ADS Straight-Line for Real Property Assuming Mid-Month Convention (Percentage Rates) For Property Placed in Service after December 31, 2017; 30-Year Residential Rental Property Recovery Month Placed in Service 2 Year 3 5 6 7 8 9 10 11 12 1 2-30 31 1 3.194 3.333 0.139 2.917 3.333 0.417 2.639 3.333 0.694 2.361 3.333 0.972 2.083 3.333 1.250 1.806 3.333 1.528 1.528 3.333 1.806 1.250 3.333 2.083 0.972 3.333 2.361 0.694 3.333 2.639 0.417 3.333 2.917 0.139 3.333 3.194 10 11 12 For Property Placed in Service after December 31, 1986; 40-Year Nonresidential Real Property* Recovery Month Placed in Service Year 1 2 3 4 5 6 7 8 9 1 2.396 2.188 1.979 1.771 1.563 1.354 1.146 0.938 0.729 2-40 2.500 2.500 2.500 2.500 2.500 2.500 2.500 2.500 2.500 41 0.104 0.312 0.521 0.729 0.937 1.146 1.354 1.562 1.771 0.521 2.500 1.979 0.313 2.500 2.187 0.104 2.500 2.396 Also used for residential rental property placed in service before 2018. Date Placed Fourth and In Service First Year Second Year Third Year Later Years 2019* $10,100 $16,100 $9,700 $5,760 2018 $10,000 $16,000 $9,600 $5,760 2017 $ 3,160 $ 5,100 $3,050 $1,875 *The TCIA of 2017 significantly increased the annual limitations beginning in 2018. Because the 2020 indexed amounts were not available when we published, the 2019 amounts are used in the Examples and end-of-chapter problem materials