Dennis Harding is considering acquiring a new automobile that he will use 100% for business in the subsequent year. The purchase price of the automobile would be $48,500. If Dennis leased the car for five years, the lease payments would be $375 per month. Dennis will acquire the car on January 1, 2018. It will be his only business asset purchase of 2018. The inclusion dollar amounts from the IRS table for the next five years are $60, $130, $194, $232, and $268.
Dennis wants to know the effect on his adjusted gross income of purchasing versus leasing the car for the next five years. He does not claim any available additional first-year depreciation.
Click here to access the limits for certain automobiles. Click here to access the depreciation table to use for this problem.
If required, round your answers to the nearest dollar.
Complete the letter to Dennis.
| Maloney, Raabe, Hoffman, & Young, CPAs 5191 Natorp Boulevard Mason, OH 45040 |
| December 20, 2017 |
| Mr. Dennis Harding 150 Avenue I Memphis, TN 38112 |
| Dear Mr. Harding: |
| I am writing in response to your request concerning the tax consequences of purchasing versus leasing an automobile. Our calculations are based on the data you provided in our telephone conversation. |
| If the automobile is purchased, the total cost recovery deductions for the five years will be $. If the automobile is leased, lease payment deductions will total $. In addition, you also must include a total $ in your gross income. |
| If you need additional information or clarification of our calculations, please contact us. |
| Sincerely yours, |
| Ishita J. Jones, CPA Partner |
Feedback
Taxpayers may write off the cost of certain assets that are used in a trade or business or held for the production of income. The law places special limitations on the cost recovery deduction for passenger automobiles. These statutory dollar limits were imposed on passenger automobiles because of the belief that the tax system was being used to underwrite automobiles whose cost and luxury far exceeded what was needed for their business use.
Complete the memo for the tax files.
| TAX FILE MEMORANDUM | ||||||||||||||||||||||||||
| DATE: December 20, 2017 | ||||||||||||||||||||||||||
| FROM: Ishita J. Jones | ||||||||||||||||||||||||||
| SUBJECT: Dennis Harding: Calculation of lease versus purchase | ||||||||||||||||||||||||||
| Facts Dennis Harding is considering purchasing or leasing an automobile on January 1, 2018. The purchase price of the automobile is $48,500. The lease payments for five years would be $375 per month. Dennis wants to know the effect on his adjusted gross income for purchasing versus leasing the automobile for five years. | ||||||||||||||||||||||||||
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Purchase – cost recovery deduction
Year-----------Cost-------------5 year-------------Cost recovery------------Limited to
2018---------$48,500------------20%------------------$9700-----------------------$3160
2019---------$48,500------------32%------------------$15520----------------------$5100
2020---------$48,500-----------19.2%-----------------$9312-----------------------$3050
2021---------$48,500-----------11.52%----------------$5587-----------------------$1875
2022---------$48,500-----------11.52%----------------$5587-----------------------$1875
Total cost recovery deduction --------------------------------- ------------------$ 15,060
Lease payments ($375 * 60) ------------------------------- $22,500
Inclusion dollar amount = $60 + $130 + $194 +$232 + $268 = $ 884
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