Modified Accelerated Cost Recovery System (MACRS), Election to Expense, Listed P
ID: 2395376 • Letter: M
Question
Modified Accelerated Cost Recovery System (MACRS), Election to Expense, Listed Property, Limitation on Depreciation of Luxury Automobiles
(LO 7.4, 7.5, 7.6, 7.7)
During 2016, William purchases the following capital assets for use in his catering business:
Assume that William decides to use the election to expense on the baking equipment (and has adequate taxable income to cover the deduction) but not on the automobile (which has a 5-year recovery period), and he also uses the MACRS accelerated method to calculate depreciation but elects out of bonus depreciation. Assume he has adequate taxable income.
Click here to access the depreciation table and click here to access the annual automobile depreciation limitations.
Calculate William's maximum depreciation deduction for 2016, assuming he uses the automobile 100 percent in his business.
New passenger automobile (September 30) $31,600 Baking equipment (June 30) 9,480Explanation / Answer
Passenger automobile: depreciation rate for a 5 year recovery period asset is 20% in the year placed in service. 20% of 31,600 is 6,320. but passenger automobile depreciation in the first year is limited to 3,160 in the year placed in service. Hence, depreciation is $3,160 on passenger automobile
Baking equipment: since, baking equipment is elected to expense, depreciation is 100% of cost, $9,480.
Total depreciation = $3,160 + $9,480 = 12,640
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