Prepare a 500-750 word written response to the following: In January 2010, Salem
ID: 2727258 • 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
Salem corporation purchased $350000 of new MACRS5-Year property in January 2010. The depreciation for year 2010 if Salem corporation used straight line method is 35000$ as
= $350000/5 = 70,000$ which is charged based on half year covention.
In which asset put to use at anytime durning the year are charged to half yearly depreciation only.
The maximum depeciation that is allowed under special depreciation allowance for cetain qualified proferty that were acquired after December 31,2007 and placed in service before january 1, 2013 is 50%
If Saleem had been located in Qualified enterprise zone , and the property falls under defination of special depreciation, It can charge maximum 50% depreciation in the first year. That is $ 175000
The depreciation method used by me is special allowances that were aannounced under the scheme in Qualified enterprise zone to promote investments.
Total tax saving under Qualified enterprise zone property ( Special allowance )
Tax savings for the first year is 175000 * tax rate
and for the remaining years would be 43750 * 12.5% * tax rate discounted at given rate
Where under Straight line method would be
Tax savings for first year = $35000 * tax rate
Tax savings for year two to four = $70000 * tax rate ( net of discount rate )
Tax savings for 5th year = $105000 * tax rate ( net of discount rate )
Thus tax rate and present value would change under different method of depreciations and thus in special scheme the savings are more initially leading to a higher net present value
where as under straight line method tax benefit are more in later year and thus present value would be low net present value on account of savings in later year are dicounted at higher variable.
Salem would not choose to take as much depreciation possible in the years when net profit or revenues are negative. Saleem would like to charge higher depreciation only in year in which there are higher revenues.