During 2014, William purchases the following capital assets for use in his cater

Question

During 2014, 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 but not on the automobile (which has a 5-year recovery period), and he also uses the MACRS accelerated method to calculate depreciation. Assume he has adequate taxable income.

Calculate William's maximum depreciation deduction for 2014, assuming he uses the automobile 100 percent in his business.

Explanation / Answer

William decides to use the election to expense on the baking equipment. That means he want to take Sec 179 deduction. Sec 179 is available for the new assets purchased during the year. There are two limitations to the amount of deduction that can be claimed. First one is income limitation and the second one is monetary limitation.

Income limitation means the business entity should have adequate profit to claim total cost of the asset as deduction. In other words, after claiming sec 179 deduction it should not result in loss. Monetary limitation is the maximum amount that can be claimed during the year. Even if the company purchases assets during the year more than the maximum amount and has adequate profit it cannot claim more than the monetary limitation. But the excess can be carried forward to the next years. Monetary limitation during 2014 is $ 500,000

As the assets purchased during the year are less than the monetary limit of $ 500,000 and it has adequate profit to claim sec 179 deduction, the depreciation expense of Baking Equipment will be $ 13,080.

The maximum depreciation that applies for passenger vehicle is $ 3,160, but as the vehicle purchased is eligible for Special depreciation allowance it is increased by $ 8,000. So the total depreciation on the automobile is $11,160. It is given that automobile is used 100% in business; the depreciation will not be decreased.

Hence William’s maximum depreciation deduction for 2014 is $ 13,080 + $ 11,160 = $ 24,240.

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