Question

Section 179. (Obj. 2) Sand Corporation buys one asset in 2018---machinery costing $32,300,000. The machine was placed in service on June 2, 2018. Sand wants to elect the maximum Section 179 possible, even if some must be carried over to 2019. Sand's 2018 business income limitation (taxable income before Section 179 expense, but after all other expenses, including depreciation) is $167,000. A) Compute the maximum Section 179 Sand can elect to expense in 2018, the actual allowed 2018 expense deduction, and the Section 179 carryover to 2019. B) What is the regular depreciation deduction on the machine (7-year property; half-year convention) after taking into account the maximum section 179 deduction and assuming no bonus depreciation is clamied?

Answer 1

Answer:

A) As per IRS 2018 publication 946
"The total amount you can elect to deduct under section179 for most property placed in service in tax years beginning in 2018 generally cannot be more than $1,020,000. If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $1,020,000. You do not have to claim the full $1,020,000.

Costs Exceeding $2,550,000
If the cost of your qualifying section 179 property placed in service in a year is more than $2,550,000, you must generally reduce the dollar limit (but not below zero) by the amount of cost over $2,550,000. ie, If the cost of your section 179 property placed in service during 2018 is $3,570,000 or more, you cannot take a section 179 deduction.In above case as the cost of Machinery is $32,300,000, hence deduction u/s 179 is not available.Further carry over to 2019 is also not allowed as the cost of machinery is above $3,570,000

B)

MACRS Rates--Half-Year Convention, for 7 year property the rate of depreciation for 1st year is 14.29%  
Hence depreciation is:                              
$ 32,300,000.00 * 14.29% = $ 4,615,670.00                          
As there will be no Bonus Depreciation claimed and No Sec 179 deduction as cost of machinery exceeds the limit set by IRS (ie upto $3,570,000). Hence the maximum eligible depreciaiton os $ 4,615,670/-.

However this depreciation would be limited to the taxble income after adding back the depreciation charged to the books of account.

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