Question

Amy’s Company purchases a factory machine for $900,000 on August 5, 2017. Amy’s Company does not elect IRC Section 179 or Bonus Depreciation and this is the only asset purchased during 2017. Assume that the factory machine has a 7-YR MACRS life. Calculate the taxable gain or loss on sale for Amy’s Company if the business machine is sold for $400,000 on December 31, 2020. Please be sure to show your work to be eligible for partial credit.

Answer 1

As mentioned in the question Amy's company doesnot elect either section 179 or bonus depreciation than only method left for claiming depreciation will be

Modified Accelerated Cost Recovery system

In above system there different class of different assets as given in question factory machinery has 7 years of life in 7 year class rate will be 200%.

In the system we have choose the convention

We have both options for selecting the convention.

A. Half - year convention- it is used when property is purchased or disposed in the middle of year.

B. Mid- quarter convention- if more than 40% of property placed into the service of last quarter.

In given question factory machinery is purchased in August so we shall use mid year convention.

Depreciation of 2017.

Purchase price $900,000.

Depreciation = book value ×2/7 ×1/2.

$900,000 ×2/7 ×1/2  

$12,8571 Depreciation

Book value at December 2017 $771429 difference between purchase price and depreciation.

Note:

2/7 represents 200% of 7 years MACRS life. It will be applicable during the life of the assets.

1/2 represents mid year convention it is applicable only in year of purchase

Depreciation for 2018.

Depreciation = book value ×2/7 refer note.

$771,429×2/7

$220,408 Depreciation for 2018

Book value at December 2018 $551021. Difference between book value of 2017 and Depreciation 2018.

Depreciation for 2019

Depreciation = book value × 2/7 refer note.

$551,021 ×2/7

$157,435 Depreciation for 2019

Book value at December 2019 $$393,586 difference between book value 2018 and Depreciation 2019

Depreciation for 2020

Depreciation = book value × 2/7 refer note

$393,586 ×2/7

$112,453.

Book value at December 31 2020 $281,133. Difference between book value at December 2019 and Depreciation 2020

So calculation of taxable gain or loss.

Taxable gain or loss = selling price - book value at December 2020.

$400,000 (given in question) - $281,133 ( by above calculation).

$ 118,867 of taxable Gain.