Chapter 8, Problem 41P

Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $420,000 on May 20, 2019. 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.

1. a. Determine Lori’s total cost recovery deduction if the § 179 expense is first taken with respect to the 5-year class asset.
2. b. Determine Lori’s total cost recovery deduction if the § 179 expense is first taken with respect to the 7-year class asset.
3. c. What is your advice to Lori?
4. d. Assume that Lori is in the 24% marginal tax state and Federal income bracket and that she elects § 179 for the 7-year asset. Determine the present value of the tax savings from the cost recovery deductions for both assets. See Appendix H for present value factors, and assume a 6% discount rate.
5. e. Assume the same facts as in part (d), except that Lori decides not to use § 179 on either asset. Determine the present value of the tax savings under this choice. In addition, determine which option Lori should choose.
6. f. Present your solution to parts (d) and (e) of the problem in a spreadsheet using appropriate Microsoft Excel formulas. E-mail your spreadsheet to your instructor with a two-paragraph summary of your findings.