Reference no: EM132450566

Problem - Sam Johnson started a small machine shop, Machines, Inc., in his garage and incorporated it in March of 2013 as a calendar-year corporation. At that time, he began using his personal computer and tools solely for the business as part of his contribution to the corporation. The computer cost $2,700 but had a fair market value of only $900 at conversion and the tools, which had cost $1,500, were valued at $1,100. During 2013, Machines, Inc. purchased two machines: Machine A, purchased on May 2, cost $24,000; Machine B, purchased on June 5, cost $40,000.

The corporation expensed Machine A under Section 179. The computer, tools, and Machine B were depreciated using accelerated MACRS only. The corporation did not take any depreciation on the garage nor did Sam charge the business rent because the business moved to a building the business purchased for $125,000 on January 5, 2014. On January 20, 2014, Machines purchased $4,000 of office furniture and on July 7, it purchased Machine C for $48,000. It depreciated these assets under MACRS (including allowable bonus depreciation), but did not use Section 179 expensing. Machines acquired no new assets in 2015.

On February 4, 2016, Machines bought a new computer system for $5,100. It sold the old computer the same day for $300. On March 15, it sold Machine A for $6,000 and purchased a more versatile machine for $58,000. On August 15, Machines sold bonds it had purchased with $9,800 of the cash Sam had originally contributed to the corporation for $10,400 to pay creditors. The business takes only the maximum allowable MACRS depreciation deduction on assets purchased in 2016 with no Section 179 expensing or bonus depreciation.

Required -

1. Determine Machines, Inc.'s depreciation expense deductions for 2013 through 2016.

2. Determine the realized and recognized gains or losses on the property transactions in 2016.