Question

Margo, a calendar year taxpayer, paid $580,000 for new machinery (seven-year recovery property) placed in service on August 1, 2017. Use Table 7-2. Assuming that the machinery was the only tangible property placed in service during the year, compute Margo’s maximum cost recovery deduction. How would your answer to part a change if the machinery was purchased in 2018 instead of 2017? COnsider section179, bonus and MACRS depreciation.

Answer 1

Answer:

2017

Margo’s maximum cost recovery deduction:

Total cost of depreciable machinery = $580,000

Section 179 election and deduction = ($510,000)

Tax after section 179 deduction = $580,000 + ($510,000) = $70,000

Bonus Depreciation 50% = $70,000 * - 50% = ($35,000)

Tax Basis after Bonus depreciation = $70,000 + ($35,000) = $35,000

MACRs depreciation (7 year) rate for year 1 = 14.29%

MACRs Depreciation for year 1 = $35,000 * 14.29% = $5,002

Hence Margo's maximum recovery = Section 179 deduction + Bonus depreciation + MACRs depreciation

= $510,000 + $35,000 + $5,002

= $550,502

2018:

Change if the machinery was purchased in 2018 instead of 2017

In 2018, section 179 deduction limit increases to $1,000,000.

Hence,

Since the cost of new machinery is $580,000 purchased in 2018, Margo can deduct the full amount of $580,000 as section 179 deduction.

Hence if machine was purchased in 2018, Margo's maximum cost recovery deduction = $580,000