Question

On June 21, 2018, Duckwall Co. purchased and placed in service $3,185,000 of 5-year recovery property (not an SUV). It is used 100% for business and Is the only property placed in service during the year.

What is the maximum cost recovery deduction available if the Duckwall Co.​ has taxable income of $1.5 million before the cost recovery deduction?

The Duckwall Co. does not elect out of Section 179 expensing or the additional first-year deprecation deduction.

A.   $1,722,000

B.   $3,185,000

C.   $2,037,000

D.   $1,500,000

Answer 1

Answer is D - $1,500,000

Explanation:

• Tax Year - 2018
• Business Usage = 100%
• Since Business usage is 100%, Cost basis = $3,185,000 x 100% = $3,185,000

Note: Section 179 is generally taken first, followed by Bonus Depreciation

a. Section 179 depreciation:

Section 179 of the IRS tax code allows small businesses to deduct the entire or full purchase price of the Qualifying asset/property. However the maximum amount of deduction a business can cliam under this section is $1,000,000 (In 2018) provided, the cost basis or the purchase price of the qualifying asset is $2,500,000 or less.

If purchase price of the qualifying asset is more than aforementioned limit of $2,500,000, the deduction will begin to phase out. in simple terms, the deduction begins to phase out on a dollar-for-dollar basis after $2,500,000 is spent by a given business (thus, the entire deduction goes away once $3,500,000 in purchases is reached), so this makes it a true small and medium-sized business deduction.

Therefore section 179 deduction is computed as follows

Entire purchase price	$3,185,000
Limit under Section 179	$2,500,000
Difference - Phaseed out deduction	$685,000
Section 179 deduction if purchase price is $2,500,000 or Less	$1,000,000
Section 179 deduction after phased out - Since purchase price is more than $2,500,000	$315,000 [$1,000,000 - $685,000]

Therefore, Section 179 deduction, Duckwall Co. can claim = $315,000

b. Additional first-year deprecation deduction. or Bonus Depreciation:

A Business tax payer can claim 100% of Purchase price of a Qualified property

Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,500,000) on new capital equipment (qualified property). Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.

Additional first year depreciation or Bonus depreciation is computed as follows:

Pruchase cost of the Qualified property	$3,185,000
Less: Section 179 deduction	$315,000
	$2,870,000
Percentage of First Year Additional depreciation or Bonus depreciation	100%
Therefore, First Year additional depreciation ($2,870,000 x $100%)	$2,870,000

Therefore,

Total depreciation = Section 179 Deduction + Bonus Depreciation

= $315,000 + $2,870,000

= $3,500,000

However since the taxable profit of Duckwall Co. is $1,500,000, the maximum cost recovery deduction is limited to $1,500,000.

Note: Remaining deduction of $1,685,000 ($3,185,000 - $1,500,000) can be carryforward to future Years.