Question

Problem 8-42 (c) (LO. 2, 3)

Gilbert is the proprietor of a small business. In 2019, the business income, before consideration of any cost recovery or § 179 deduction, is $2,000,000. Gilbert spends $2,870,000 on new seven-year class assets (use half year convention), and elects to take the § 179 deduction on them. He elects not to take additional first-year depreciation. Gilbert's cost recovery deduction for 2019, for 5-year assets( not purchased this year), is $780,000. If an amount is zero, enter "0". If required, round your intermediate computations and final answers to the nearest dollar. Click here to access the depreciation table to use for this problem.

a. What is the tentative amount of Gilbert's overall § 179 deduction for the seven-year class assets before any income limitation?
$

b. Gilbert's cost recovery amount (excluding any § 179 deduction) for the seven-year class assets is $.

c. The total amount of Gilbert's § 179 deduction for the seven-year class assets after any income limitation is $.

d. Gilbert's total cost recovery depreciation deduction (including any § 179 deduction) is $.

e. What is the amount of any § 179 carryforward?

Answer 1

a. What is the tentative amount of Gilbert's overall § 179 deduction for the seven-year class assets before any income limitation?

Cost of New Seven Year Class Asset = $ 2,870,000 ($ 2.87 million)

According to Section 179 expenses and Section 168(g) depreciation under Tax Cuts and Jobs Act

The Maximum Deduction under Section 179 on Individual Property is $ 1 million with Purchase Limit of $ 2.5 million.

If Purchase Exceeds $ 2.5 million then Section 179 deduction will decrease Dollar by Dollar Basis (Means for every 1 dollar increase the limit of $ 1 million will reduce by 1 dollar )

Therefore the Tentative Amount of Gilbert's overall § 179 deduction for the seven-year class assets before any income limitation is

Cost of Asset Purchased : $ 2,870,000 ($ 2.87 million)
Excess Purchase over Purcahse Limit : $ 2.87 million - $ 2.50 million = $ 0.37 million

So Section 179 deduction = $ 1 million - $ 0.37 million = $ 0.63 million ($ 630,000)

b. Gilbert's cost recovery amount (excluding any § 179 deduction) for the seven-year class assets.

The Question Provides 2 Conditions:

1. Half Year Convention Needs to be Used (Means only Half Year Depreciation needs to be provided assuming that Asset was purchased in Middle of the Year)
2. Gilbert has elected not to take Additional First Year Depreciation (Also Called Bonus Depreciation)

Therefore Gilbert's cost recovery amount (excluding any § 179 deduction) for the seven-year class assets will be calculated as :

[(Cost of Seven Year Class Asset - Section 179 deduction claimed)] /   (Useful Life of Asset) * (1/2)

[(2,870,000 - 630,000)] / (7) * (1/2)   

$ 160,000

c. The total amount of Gilbert's § 179 deduction for the seven-year class assets after any income limitation.

Taxable Income before deduction under Section 179:

Business Income : $ 2,000,000

Less : Depreciation on 5 Year Class Asset : ($ 780,000)

Less : Depreciation on 7 Year Class Asset : ($ 160,000)

Taxable Income before Deduction under Section 179 : $ 1,060.000

Therefore there is enough Taxable Income to absorb Section 179 Deduction on Seven Year Class Assets.

Answer : $ 630,000

d. Gilbert's total cost recovery depreciation deduction (including any § 179 deduction)

Section 179 Deduction	$                                 630,000.00
Depreciation on 5 Year Class Asset	$                                 780,000.00
Depreciation on 7 Year Class Asset	$                                 160,000.00
	$                             1,570,000.00

e. What is the amount of any § 179 carryforward?

There will be no Carryforward of Section 179 Deduction as the Taxable Income was adequate enough to absorb the Whole Deduction.