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2 years ago
Larry Corporation purchased a new precision casting machine for its manufacturing facility. The machine cost $2 million, and another $150,000 was spent on installation. The machine was placed in service in June 2009. The old machine, which was placed in service in 2003, was sold in 2009 to an unrelated party for a $250,000 financial accounting profit. What asset disposition and capital recovery issues do you need to address when removing the old machine from, and placing the new machine on, the financial accounting and tax books and in calculating the 2009 tax depreciation?
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Prentice Hall's Federal Taxation 2014 Corporations, Partnerships, Estates & Trusts
Edition: 27th
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2 years ago
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The following tax issues need to be addressed regarding Larry's asset acquisition and disposition (assuming the corporation does not qualify for the small business exemption):

Old machine:
•   What amount of depreciation can be claimed for financial accounting, taxable income, AMTI, ACE, and E&P purposes in the year of disposition?
•   What is the amount and character of the gain to be reported on the disposition of the old machine for financial accounting, taxable income, AMTI, ACE, and E&P purposes?
•   What costs incurred in connection with the disposition of the old machine are deductible?

New machine:
•   What costs incurred in connection with the acquisition of the new machine must be capitalized?
•   What costs incurred in connection with the acquisition of the new machine can be expensed?
•   Should a Sec. 179 expensing election be made for part of the cost of the new machine?
•   What amount of depreciation can be claimed on the new machine for financial accounting, taxable income, AMTI, ACE, and E&P purposes in the year of acquisition? Should any special MACRS elections be made (e.g., 150% DB or straight-line depreciation) for any of the four tax-related depreciation calculations?

The cost of the precision casting machine and the installation costs must be capitalized. Different capital recovery calculations must be made for taxable income, AMTI, ACE, and E&P purposes, although, for property placed in service after 1993, AMTI and ACE depreciation are the same. Consideration should be made to using the same capital recovery method for taxable income and AMT purposes. In addition, the $250,000 financial accounting profit must be adjusted to determine the gain recognized for taxable income, AMTI, ACE, and E&P purposes with respect to the old machine.
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