It is July of 2010, and Thirsty Thelma has just started a new wine delivery business named The Champagne Shuttle in San Diego, California. In addition to purchasing a delivery van, Thelma has also purchased a large warehouse that she is using to store and cool the wine. Thelma incurred the following costs associated with getting the building "up and running":
DESCRIPTION COST
Building $530,000
Equipment that uses solar energy to cool the structure 175,000
Installation of a wider garage door (for the van to use) 16,000
Closing costs 3,000
TOTAL $724,000
Thelma's oldest son, Thor, is an accounting student at a local university and is preparing The Champagne Shuttle's 2010 tax return. He has asked that your consulting team "take a second look" just to make sure he has not missed anything. Thor tells you how he plans to treat the costs related to the purchase:
• Building: Capitalize $530,000, take $500,000 as §179 depreciation, and depreciate the remaining $30,000 over 39 years.
• Equipment: Take an energy investment credit for 30% of the expense (since it uses solar energy) and then depreciate $175,000 using MACRS over seven years.
Explains any errors in his assumptions related to the cost recovery basis or depreciation methods that he is planning to use on the tax return. Remember: Thor is an egocentric client so it is necessary to be tactful in your response. You must use primary sources of tax law to support each conclusion.