Question

Elakin Inc., a calendar year taxpayer, paid $1,339,000 for new machinery (seven-year recovery property) placed in service on August 29, 2017. The machinery was Elakin’s only asset purchase during 2017, and Elakin’s taxable income before any Section 179 deduction was $14 million.

1. Compute Elakin’s 2017 cost recovery deduction with respect to the machinery.

1. How would your answer change if the cost of the machinery was $2,150,000 instead of $1,339,000?

1. How would your answer to a. change if Elakin’s taxable income before any Section 179 deduction was $281,400 instead of $14 million?

Answer 1

Assuming that Elakin Inc utilises both Section 179 deduction and Bonus depreciation.

Maximum deduction under section 179 for the year 2017 is $500,000

Bonus depreciation will be only 50% as the asset was purchased before the change of rate to 100%.

We also use half year convention MACRS for calculating normal depreciation (7 ueary recovery period). So first year rate will be 14.29%

(a)

Section 179 deduction is $500,000

Bonus depreciation = 50% (1,339,000 - $500,000)

= $419,500

Normal depreciation = ($1,339,000 - $500,000 - $419,500) x 14.29%

= $59,947

Total Cost recovery deduction for the year is

= $500,000 + $419,500 + $59,947

= $979,447

(b)

If the Cost of machinery is $2,150,000

Once the cost of machinery has exceeded $2,000,000, the section 179 deduction will be phased out dollar to dollar.

So the maximum amount allowable is $350,000

Bonus depreciation = ($2,150,000 - $350,000) x 50%

= $900,000

Depreciation = ($2,150,000 - $350,000 - $900,000) x 14.29%

= $128,610

Cost recovery = $350,000 + $900,000 + $128,610

= $1,378,610

(c)

If the taxable income is $281,400 and Equipment cost is $1,339,000

Section 179 deduction will not take the profit into losses. That means deduction will only be allowed until the profit become zero. This is not the case with Bonus depreciation and normal depreciation.

Section 179 deduction = $281,400 (restricted)

Bonus depreciation = 50% ($1,339,000 - $281,400)

= $528,800

Depreciation = ($1,339,000 - $281,400 - $528,800) x 14.29%

= $75,566

Cost recovery amount for the year

= $281,400 + $528,800 + $75,566

= $885,766