Problem 8-41 (LO. 2, 3, 9)

Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $420,000 on May 20, 2018. Lori expects the taxable income derived from her business (without regard to the amount expensed under 179) to be about $550,000. Lori has determined that she should elect immediate 179 expensing in the amount of $520,000, but she doesn't know which asset she should completely expense under 179. She does not claim any available additional first-year depreciation.

Click here to access Exhibit 8.1 and the depreciation table to use for this problem.

If an amount is zero, enter "0".

a. Determine Lori's total cost recovery deduction if the 179 expense is first taken with respect to the 5-year class asset.

5-year class property
	Immediate expense deduction under 179	$
	Regular MACRS
7-year class property
	Immediate expense deduction under 179	$
	Regular MACRS
Total deduction		$

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Under the modified accelerated cost recovery system (MACRS), the cost of an asset is recovered over a predetermined period that is generally shorter than the useful life of the asset or the period the asset is used to produce income. MACRS provides separate cost recovery tables for realty (real property) and personalty (personal property). Write-offs are not available for land because it does not have a determinable useful life. Cost recovery allowances for real property, other than land, are based on recovery lives specified in the law. Section 179 (Election to Expense Certain Depreciable Business Assets) permits the taxpayer to elect to write off up to part of the acquisition cost of tangible personal property used in a trade or business.

b. Determine Lori's total cost recovery deduction if the 179 expense is first taken with respect to the 7-year class asset.

7-year class property
	Immediate expense deduction under 179	$
	Regular MACRS
5-year class property
	Immediate expense deduction under 179	$
	Regular MACRS
Total deduction		$

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Correct

c. If 179 expense is first allocated to the seven-year class property, the deduction for the year would be $ larger.

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Correct

For parts d. and e. Assume a 6% discount rate with the following present value factors: Year 1: 1.000, Year 2: 0.9434; Year 3: 0.8900, Year 4: 0.8396, year 5: 0.7921, Year 6: 0.7473, Year 7: 0.7050, Year 8: 0.6651.

Round each present value computation to the nearest cent. Round your final answer to the nearest dollar.

d. Assume that Lori is in the 24% marginal tax bracket and that she uses 179 on the 7-year asset.

The present value of the tax savings from the depreciation deductions for both assets $.

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Incorrect

e. Assume that Lori is in the 24% marginal tax bracket and that Lori decides not to use 179 on either asset.

The present value of the tax savings under this choice is $.

Lori should expense the 7-year asset.

For parts d. and e Assume a 6% discount rate with the following present value factors: Year 1: 1,000, Year 2 : 0.9434; Year 3: 0.8900, Year 4: 0.8396, year : 0.7921, Year 6:0.7473, Year 7: 0.7050, Year 8:0.6651 Round each present value computation to the nearest cent. Round your final answer to the nearest dollar. d. Assume that Lori is in the 24% marginal tax bracket and that she uses 179 on the 7-year asset. The present value of the tax savings from the depreciation deductions for both assets 129,600 X Feedback e. Assume that Lon is in the 24% marginal tax bracket and that Lori decides not to use 179 on either asset. The present value of the tax savings under this choice is Lori should expense the 7-yeaasset. 177,600 X Problem 8-41 (LO. 2, 3, 9) Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $420,000 on May 20, 2018. Lori expects the taxable income derived from her business (without regard to the amount expensed under 179) to be about $550,000. Lori has determined that she should elect immediate 179 expensing in the amount of $520,000, but she doesn't know which asset she should completely expense under 179. She does not claim any available additional first-year depreciation. Click here to access Exhibit 8.1 and the depreciation table to use for this problem. If an amount is zero, enter "O" a. Determine Lori's total cost recovery deduction if the 179 expense is first taken with respect to the 5-year class asset. 5-year class property Immediate expense deduction under 5 179 200,000V Regular MACRS 0 7-year class property Immediate expense deduction under S 179 320,000V Regular MACRS 14,290 Total deduction 534,290V Feedback b. Determine Lori's total cost recovery deduction if the 179 expense is first taken with respect to the 7-year class asset. 7-year class property Immediate expense deduction under 5 179 420,000 Regular MACRS 0 5-year class property Immediate expense deduction under S 179 100,000 20,000 540,000 Regular MACRS Total deduction Feedback c. If 179 expense is first allocated to the seven-year class property, the deduction for the year would be 5,710 larger