Final answer:
Judy should consider forgoing the bonus depreciation and instead use the MACRS table to align larger deductions with her expected higher tax bracket in the future. In her current 12% bracket, the immediate large deduction from bonus depreciation would not be as beneficial as deferring larger deductions until she reaches the highest marginal bracket.
Step-by-step explanation:
In addressing the question of whether Judy, a sole proprietor, should use the maximum bonus depreciation or forgo it for the equipment purchased in 2020 for her manufacturing business, we need to consider her current tax situation and future expectations. With Judy being in a 12% marginal income tax bracket and expecting to move to the highest marginal bracket after two years, it would be more beneficial to maximize her deductions while in the higher tax bracket, thus deferring the larger deductions until then when they would provide greater tax savings.
Therefore, the advice would be to forgo bonus depreciation and instead use the Modified Accelerated Cost Recovery System (MACRS) table.
Option A, using the maximum bonus depreciation and the MACRS table, allows for an immediate large deduction, which may not be as beneficial in Judy's current lower tax bracket. On the other hand, forgoing the bonus depreciation (Option B), which is possible under the Tax Cuts and Jobs Act, allows for more consistent deductions over the useful life of the equipment, aligning larger deductions with her expected move to a higher tax bracket. This would optimize her tax savings over time.
Therefore, for Judy, the most tax-efficient method appears to be Option B: Forgoing bonus depreciation and using MACRS. It's important to note that this advice could vary with different tax circumstances and future tax rate expectations.