Margie Taxon is negotiating the purchase of a business. The final purchase price has been agreed upon ($2,300,000), but the allocation of the purchase price to the assets is still being discussed. Appraisals on the warehouse/land range from $1,500,000 to $1,800,000.

Scenario #1) The value of $1,200,000 is used for the warehouse and $300,000 for the land, the remaining $800,000 will be allocated to office furniture, fixtures, and equipment.

Scenario #2) The value of $1,400,000 is used for the warehouse and $400,000 for the land, the remaining $500,000 will be allocated to office furniture, fixtures, and equipment.

Margie wants to know what effect each scenario will have on cost recovery during the first and second year of ownership. Under the agreement, Margie will take possession on January 1 next year.

Write a memo to the tax file outlining the issues and the most tax advantageous choice for Margie and your recommendation. Support your answer with calculations and remember to consider the effect of immediate first year expensing.

As you work through this, you should consider FOUR different scenarios. Scenario #1 and #2 with and without immediate expensing.