You are required to follow the Red Wolf guidelines for Tax Research that are found in the BUS A328 and BUS A329 Tax Research Model.doc file that is an attachment to your first tax research case. Prepare a file memo and a client letter following the examples provided in the Research Model file noted above. Assume that you are writing up this case on February 1, 2021.

The facts for your case:

Fictitious Cattle Company (hereafter the FCC), a sole proprietorship has estimated that it will earn taxable income in 2021 of $280,000 before any depreciation deductions. Their accountant, Natalie Therese Know, has contacted you for planning advice.

January 2, 2021

Dear Red Wolf,

My uncle hired me to be the accountant here at his sole proprietorship, the FCC.

The FCC needs to purchase office furniture. We have two choices.

We can purchase new office furniture for $1,400,000 or purchase used office furniture for $1,200,000. We would place it in service during the first quarter of 2021.

I am a cost accountant and have a limited knowledge of tax. Just enough to know that I need to ask questions and get advice. My uncle told me about bonus depreciation, §179 expensing, and MACRS depreciation. However, I do not trust his tax knowledge.

My questions are:

What is bonus depreciation?

Would either of these purchases qualify for bonus depreciation?

My uncle said that §179 expensing is a choice made by election. What is §179 expensing? He is also worried about the mood in Congress. He thinks this expensing provision might be eliminated in 2022.

Assuming that neither purchase would qualify for bonus depreciation, should I follow his advice and elect to take $50,000 of §179 expensing?

Can you offer suggestions that would maximize our total cost recovery or depreciation that we could take for 2021?

When you make your suggestions, please address my uncle’s concern. He wants to know what the maximum amount of §179 expensing that could be taken for 2021. He wants to know what amount of carryover would be at risk for §179. Is there a way to minimize this risk? If so, how would you recommend minimizing the carryover?