Sam Johnson started a small machine shop, Machines, Inc., in his garage and incorporated it in March of 2013 as a calendar-year corporation. At that time, he began using his personal computer and tools solely for the business as part of his contribution to the corporation. The computer cost $2,700 but had a fair market value of only $900 at conversion and the tools, which had cost $1,500, were valued at $1,100. During 2013, Machines, Inc. purchased two machines: Machine A, purchased on May 2, cost $24,000; Machine B, purchased on June 5, cost $40,000.
The corporation expensed Machine A under Section 179. The computer, tools and Machine B were depreciated using accelerated MACRS only. The corporation did not take any depreciation on the garage nor did Sam charge the business rent because the business moved to a building the business purchased for $125,000 on January 5, 2014 On January 20, 2014, Machines purchased $4,000 of office furniture and on July 7, it purchased Machine C for $48,000. It depreciated these assets under MACRS (including allowable bonus depreciation) but did not use Section 179 expensing. Machines acquired no new assets in 2015.
On February 4, 2016, Machines bought a new computer system for $5,100. It sold the old computer the same day for $300. On March 15, it sold Machine A for $6,000 and purchased a more versatile machine for $58,000. On August 15, Machines sold bonds it had purchased with $9,800 of the cash Sam had originally contributed to the corporation for $10,400 to pay creditors. The business takes the maximum allowable MACRS depreciation deduction on assets purchased in 2016 but with no Section 179 expensing or bonus depreciation.
a. Determine Machines, Inc.'s depreciation expense deductions for 2013 through 2016.
b. Determine the realized and recognized gains or losses on the property transactions in 2016.