Question

11)

In May of 2019, taxpayer acquires and places in service machinery (seven-year property) with an initial basis of $2,670,000. Taxpayer places no other property into service during the year and has net income before deductions of $20 million dollars. Assume the taxpayer elects not to deduction bonus depreciation. Determine the total cost recovery deduction including section 179 immediate expensing and MACRS depreciation the taxpayer may deduct for 2019.

FRO THE TAX YEAR 2019

A) $2,670,000

B) $1,255,785

C) $484,395

D) $1,152,933

Answer 1

Per IRS, the maximum allowed Section 179 Deduction for the 2019 tax year is $1,020,000. However , this amount is reduced dollar by dollar for the assets placed in service by the company in excess of $2,550,000. Additionally the total depreciation expense that can be claimed by the company is limited to the company's Net Income.

Step 1:- Calculation Section 179 Depreciation expense

Section 179 Depreciation expense Phase out = $2,670,000 - $1,550,000 = $120,000

Total allowed Section 179 Depreciation expense = $1,020,000

Section 179 Depreciation expense after phase out = $1,020,000 - $120,000

Section 179 Depreciation Expense = $900,000

Step 2:- Calculate MACRS Depreciation expense.

Book value of the asset = $2,670,000 - $900,000

Book value of the asset = $1,770,000

MACRS Depreciation % = 14.29%

Depreciation expense = $1,770,000 * 14.29%

MACRS Depreciation expense = $252,933

Total Depreciation expense = $900,000 + $252,933

Total Depreciation expense = $1,152,933

The correct answer for the above question is Option D - $1,152, 933.

Option A is incorrect as it is the total cost of the machinery placed in service and entire amount cannot be depreciation based on the considerations above.

Option C and Option B are incorrect based on the above calculations.

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