On June 21, 2018, Duckwall Co. purchased and placed in service $3,185,000 of 5-y
ID: 2328140 • Letter: O
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
Explanation / Answer
Answer is D - $1,500,000
Explanation:
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
$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:
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.
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]
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