Question

During 2018, Karan acquired the following assets for use in her sole proprietorship: Asset Cost Date Place in ServiceComputers & Info. System $400,00003/31/2018Assembly Equipment1,200,00008/15/2018Warehouse 700,00011/13/2018

a. What is the maximum amount of cost recovery Karen can claim with respect to these assets in 2018?

b. What is each asset’s adjusted basis as of December 31, 2018?

c. Assume Karan sells the warehouse on May 5, 2020. What will Karan’s adjusted basis in the warehouse be for purposes of determining her gain or loss on the sale?

Answer 1

a. As per section 179 of the code, businesses can immediately deduct up to $1 million for qualifying purchases of capital, with a limit of $2.5 million.

Businesses can now also take this deduction for nonresidential real property (buildings), including:

• roofs
• fire, alarm and security systems, and
• HVAC (heating, ventilation, and air conditioning) systems.

Section 179 of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period of time. Taking a deduction on an asset in its first year is called a "Section 179 deduction."

The IRS has two general requirements:

1. The property (called "qualified property") must be "tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business." Vehicles, and (starting in 2018) land and buildings are included.

2. The property must be purchased and put into service in the year in which you claim the deduction. Putting an asset into service means that you have it set up and working and you are using it in your business.

Section 179 Deduction Limits for 2018

Deduction Limit $1,000,000

Limit on Capital Purchases $2,500,000

Bonus Depreciation 100%

Here, computer and equipment qualify for the section 179 deduction, reason being they all are put into service in the year 2018 and the purchase is of less than $2,500,000.

So, in the year 2018,

Karen can deduct under section 179 for Computer and Equipment

Section 179 deduction - $1,000,000 (As per limit)

Bonus Depreciation (100%) - $600,000

Total first year deduction under section 179 - $1,600,000

For Warehouse, MACRS depreciation will be used,

Nonresidential Property--39 Years

And it is placed in service in the month of November,

Depreciation in 2018 = 0.321%

= 700,000 * 0.321%

= $2,247

Maxmimum Deduction in 2018 = $1,600,000 + 2,247

= $1,602,247

b. Each asset’s adjusted basis as of December 31, 2018

1) Computers & Info. System - NIL

2) Assembly Equipment - NIL

3) Warehouse - $697,753 (700,000 - 2247)

c. Warehouse Adjusted basis,

Purchase Price - Depreciation in 2018 - Depreciation in 2019

= 700,000 - 2247 - 17,948 (700,000*2.564%)

= $679,805