Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $410,000 on May 20, 2017. Lori expects the taxable income derived from her business (without regard to the amount expensed under § 179) to be about $800,000. Lori wants to elect immediate § 179 expensing, but she doesn’t know which asset she should expense under § 179. She does not claim any available additional first-year depreciation.
a. Determine Lori’s total cost recovery deduction if the § 179 expense is first taken with respect to the 5-year class asset.
b. Determine Lori’s total cost recovery deduction if the § 179 expense is first taken with respect to the 7-year class asset.
c. What is your advice to Lori?
d. Assume that Lori is in the 25% marginal tax bracket and that she uses § 179 on the 7-year asset. Determine the present value of the tax savings from the depreciation
deductions for both assets. See Appendix H for present value factors, and assume a 6% discount rate.
e. Assume the same facts as in part (d), except that Lori decides not to use § 179 on either asset. What is the present value of the tax savings generated by using the § 179 deduction on the 7-year asset?