Question

1. Taxpayer, who owns a wine bar, purchases a piece of equipment from the bar owner next door for $50,000. The equipment is placed in service during the third quarter of the year. Taxpayer also purchases a warehouse in September to store her product for $600,000. The building is placed in service in the fourth quarter. Assuming no Sec 179 is taken, what is taxpayer’s total depreciation deduction in year 1 for these assets?
   1. $7,145
   2. $15,491
   3. $54,494
   4. $650,000

Answer 1

Answer is C. $54,494

Please refer to the answer below for Explanations:

The Section 179 deduction applies to Property that fulfills the following two conditions:

1. Tangible personal property such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property. The TCJA amended the definition of qualified real property to mean qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.
2. The Property should be purchased and put to use within the same year as to which the deduction is intended to be claimed.

Mid-Month Convention: For the Asset purchased during the year, the asset is assumed to be placed in service in the middle of the month.

In the current scenario, the piece of equipment purchased from the bar owner next door for $50,000 qualifies for deduction under section 179.

The Warehouse purchased for storing product is not covered under the guidelines for Section 179 under the definition of Qualified Real Property. As the Warehouse

Calculating Depreciation:

Particulars		Amount in $
On Equipment:		$50,000
(Under Section 179)
On Warehouse:
Purchase Price	600000
Dep. Under SLM for 39 Years for 3.5 Months from Mid-September to end of December (Mid-Month Convention)	=600000/39*3.5/12	$4,487
	Total	$54,487 (Approx. $54,494)