In: Accounting
Burbank Corporation (calendar-year end) acquired the following property this year:
Asset | Placed in Service | Basis | |
Used copier | February 12 | $ | 7,800 |
New computer equipment | June 6 | 14,000 | |
Furniture | July 15 | 32,000 | |
New delivery truck | October 28 | 19,000 | |
Luxury auto | December 31 | 70,000 | |
Total | $ | 142,800 | |
a. Assuming no bonus or §179 expense, what is Burbank’s maximum cost recovery deduction for this year?
b. Assuming Burbank would like to maximize its cost recovery deductions by electing bonus and §179 expense, which assets should Burbank immediately expense? Assume the 2014 §179 expense limits and bonus depreciation are extended to this year.
c. What is Burbank’s maximum cost recovery deduction this year assuming it elects §179 expense and bonus depreciation?
a) Assuming no bonur or 179 expense
Burbank has to use mid quarter convention method for calculating the cost recovery of the asset since more than 40% of it asset were purchased in the last quarter i.e (70000+19000)=89000/142800*100=62.32%. For luxury vehicle as per IRS the maximum deduction in the first year is 3,160 however can take addition bonus depreciation. Since in the question no bonus to be taken hence only 3,160 is allowed.
Asset | Amount | Convention | rate | Depreciation expense |
User Copier (5 years) | 7,800 | Q1 | 35% | 2,730 |
New Computer equipment (5 year) |
14,000 | Q2 | 25% | 3,500 |
Furniture (7 year) | 32,000 | Q3 | 10.71% | 3,427 |
New delivery truck (5 year) | 19,000 | Q4 | 5% | 950 |
Luxury auto (5 year) | 70,000 | Q4 | 3,160 | |
$13,767 |
b) Since Burbank is not coming under the section 179 limitation so it can expense all of its asset except the luxury auto.
c) maximum cost recovery of Burbank if elects section 179 expense and bonus depreciation
Asset | Original basis | 179 expense | Remaining | Bonus | Remaining | Depreciation |
User Copier (5 years) | 7,800 | 7,800 | 0 | 0 | 0 | 0 |
New Computer equipment(5 year) | 14,000 | 14,000 | 0 | 0 | 0 | 0 |
Furniture (7 year) | 32,000 | 32,0000 | 0 | 0 | 0 | 0 |
New delivery truck (5 years) | 19,000 | 19,000 | 0 | 0 | 0 | 0 |
Luxury auto ( 5 years) | 70,000 | 0 | 70,000 | 8,000 | 62,000 | 3,160 |
72,800 | 8,000 | 3,160 |
Total cost recovery would be = $83,960
Please note the amount will change following the change in the tax laws
The amount of first year deprecition of luxury vehicle has been increased to 10,000 in first year and with bonus it is 18,100.
so the answer of point a changes to $13,767-3160+10,000=20,607
and the answer of point c changes to $83,960-11,160+18000=$90,800