Prepare a 500-750 word written response to the following: In January 2010, Salem
ID: 2489245 • Letter: P
Question
Prepare a 500-750 word written response to the following: In January 2010, Salem Corporation, purchased $350,000 of new MACRS 5-year property in the US. This equipment was placed in service May 1, 2010. Salem wants to take as much depreciation in 2010 as possible. Calculate the depreciation for 2010. If Salem had been located in a qualified enterprise zone, what would be the depreciation amount? Explain the depreciation method you used. In addition, include the tax benefits (savings) for the first year and the present value of the total tax benefits for the entire 5-year period. Discuss how the tax benefits and present value would change if a different method of depreciation was used. Also, discuss when Salem would not choose to take as much depreciation as possible
Explanation / Answer
MACRS is short form of Modified Accelerated Cost Reduction System. Under this method, the asset is depreciated on declining balance method. The Rates are prescribed for each year depending on the method and life of the asset.
Salem can take maximum deduction using Sec 179 deduction or by applying special depreciation allowance. As we do not have the information about profit available before depreciation, let us assume Salem is not eligible for Sec 179 deduction.
Assuming Salem satisfies all the conditions required to take special depreciation, the maximum depreciation that can be taken will be Special Depreciation plus normal depreciation. In 2010, Special depreciation that can be taken is 50% of the cost. It is $350,000 * 50% = $175,000. On the remaining basis MACRS 5- Year method is applied. Depreciation rate in the first year will be 20%. Normal depreciation is $175,000 * 20% = $35,000
Total Depreciation for 2010 = $175,000 + $35,000 = $210,000.
As we are assuming there is no Sec 179 deduction, even if Salem had been located in the qualified enterprise zone, depreciation will be same $210,000. Qualified enterprise zone will provide only additional $35,000 of sec 179 deduction. Here, it is not applicable.
Annual discount rate is provided. So it is not possible to answer rest of the questions.