Question: In this problem, you will figure the depreciation you can claim for tax purposes for the

machine shed. Use IRS Publication 946: How to Depreciation Property on the course home page http://www.irs.gov/pub/irs-pdf/p946.pdf. For this problem, you will use MACRS, electing the GDS option and not claiming any Section 179 depreciation (Read "Which Depreciation System (GDS or ADS) Applies?" beginning on p. 31 and "What is the Basis for Depreciation?" beginning on p. 35).

1. Read "Which Property Class Applies under GDS" starting on p. 32. What property class (3-year, 5-year, 7-year, etc.) must be used for the machine shed, which is technically not a single purpose agricultural or horticultural structure for tax purposes? Read "Recovery Periods Under GDS" on p. 36, but especially see Appendix B, beginning on page 102, especially page 103 where common agricultural assets are listed. What recovery period (how many years) must be used for the machine shed?
2. Suppose you built the machine shed and had it ready for use in July of 2007. Read "Which Convention Applies?" on p. 38. The machine shed is not "nonresidential real property. Because the machine shed was "placed in service" before the final three months of the year and is not a large portion of the total depreciable property you will claim for deductions during the 4 ^th quarter, I interpret this section to mean that you should use the mid-quarter convention, with the asset placed in service during the 3rd quarter. Using Chart 1 on p. 72, which depreciation table must be used for the machine shed?
3. Use the appropriate depreciation table to calculate the depreciation you will be able to claim as a deduction each year for the machine shed’s useful life as defined for tax purposes. What I want is a table staring in 2007 (when the shed was "placed in service") and what percentage of the original cost you can claim as a depreciation cost each year until the machine shed it totally depreciated for tax purposes. For example, if the machine shed were to be depreciated over 8 years, then you will have a table with year 1 starting 2007 and year 8 in 2014. I have created an example table below, under the assumption that the machine shed is a 7-year asset depreciated using straight line depreciation over 8 years and cost $70,000 (none of which are true for your case) The actual table length and percentages in the tax table to use will differ from these. The key to note in this example is that it’s a 7-year asset deprecated over 8 years under the half-year convention (none of which is true for the machine shed). You claim half a year in year 1 and another half year in year 8 and a full year’s deduction in the intervening 6 years for a total of deductions claimed for 8 years. Create a similar table for the actual answer for the machine shed, using the correct number of years, the correct percentages from the correct column in the correct table, and then determine depreciation in $ each year and the implied value of the machine shed at the end of each year. These would be the depreciation expenses for the machine shed that you could deduct from your taxable income during each year.
4. For this problem, you want to see if you can take Section 179 depreciation for the machine shed (you will elect this option, if possible, only for the machine shed and no other assets). Skim over IRS Pub 946 Electing the Section 179 Deduction (beginning on p. 15). Focus on determining whether i) whether the machine shed (a multiple purpose asset) qualifies for this deduction (see Eligible Property p. 16 and following) and ii) how much you can claim (see How Much Can you Deduct (p. 19 and following). For additional help, see http://www.farmcpatoday.com/2010/12/05/does-a-machine-shop-qualify-for-section-179/ . Also, see the 2013 IRS Pub 225 Farmer’s Tax Guide, Section 179 Expense Deduction starting on p. 39 (http://www.irs.gov/pub/irs-pdf/p225.pdf).

Specific questions to answer for this problem:

• Does the machine shed qualify for Section 179 depreciation deduction?
• What if it were a tractor ("tangible personal property") instead of a machine shed?
• If it were a tractor bought for $80,000, what is the maximum amount of Section 179 depreciation you could take as a deduction in the first year?

Price: $2.99

Solution: The downloadable solution consists of 4 pages
Deliverable: Word Document