Question

Problem 8-52 (c) (LO. 2, 5, 9)

Shelby purchased $80,000 of new furniture and fixtures for her business in July of the current year. Shelby understands that if he elects to use ADS to compute her regular income tax, there will be no difference between the cost recovery for computing the regular income tax and the AMT. Shelby wants to know the regular income tax cost, after three years, of using ADS rather than MACRS. Assume that Shelby does not elect § 179 limited expensing and that his marginal tax rate is 28%. She does not claim any available additional first-year depreciation.

If required, round your final answers to the nearest dollar.

Click here to access the depreciation tables to be used for this problem.

a. The cost recovery under MACRS at the end of three years is $.

b. The cost recovery under ADS (for AMT purposes) at the end of three years is $.

c. Assuming a marginal tax rate of 28%, the income tax cost after three years of using ADS instead of MACRS is $.

Answer 1

a. MACRS:

Year 1 [$80,000 * 14.29% (Table MACRS)] = $11,432

Year 2 = $80,000 * 24.49% = $19,592

Year 3 = $80,000 * 17.49% = $13,992

Total cost recovery = $11,432 + $19,592 + $13,992 = $45,016

The cost recovery under MACRS at the end of three years is $45,016.

b. ADS:

Year 1 [$80,000 * 10.71% (Table ADS)] = $8,568

Year 2 = $80,000 * 19.13% = $15,304

Year 3 = $80,000 * 15.03% = $12,024

Total cost recovery = $8,568 + $15,304 + $12,024 = $35,896

The cost recovery under ADS (for AMT purposes) at the end of three years is $35,896.

c. Cost recovery lost by electing ADS = $45,016 - $35,896 = $9,120

Tax cost of election = $9,120 * 28% = $2,553.60

Assuming a marginal tax rate of 28%, the income tax cost after three years of using ADS instead of MACRS is $2,553.60