Parent Corporation purchases a machine (a five-year property) for $20,000. It claims $4,000 of depreciation under the MACRS rules in the first year it owns the property. At the close of business on the last day of the first year, Parent sells the machine to a 100%-owned corporation (Subsidiary) for $18,000. Subsidiary immediately commences depreciating the machine as a five-year property using
the regular MACRS rules. What depreciation can be claimed by Subsidiary Corporation in the first year it uses the machine?
What will be an ideal response?
The basis of the machine to Parent on the sale date is $16,000 ($20,000 - $4,000). This basis and the MACRS depreciation rules carry over to Subsidiary from Parent for this portion of the acquisition cost. Parent recognizes a $2,000 gain ($18,000 - $16,000), which is deferred when the consolidated tax return is filed. Subsidiary steps up its basis for the asset by the $2,000 amount, thereby providing a total basis of $18,000. The basis increase is treated as a new asset by Subsidiary under the MACRS rules. Subsidiary's depreciation calculation is:
Carryover basis: $20,000 × 0.32 = $6,400
Basis increase: $ 2,000 × 0.20 = 400
Total depreciation $6,800
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What will be an ideal response?
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