Acorn Construction (calendar-year end C-corporation) has had rapid expansion dur

Question

Acorn Construction (calendar-year end C-corporation) has had rapid expansion during the last half of the current year due to the housing market’s recovery. The company has $5,000,000 of taxable income before the cost recovery deduction and would like to maximize its cost recovery deduction for the current year. Acorn provided the following information: Assets Placed in Service Basis New Equipment and Tools August 20 $1,750,000 Used Light Duty Trucks January 17 1,500,000 Used Machinery February 6 525,000 Total $3,775,000 The used assets had been contributed to the business by its owner in a nontaxable transaction. What is Acorn’s maximum cost recovery expense in the current year?

Explanation / Answer

Acorn’s maximum cost recovery is calculated as follows: Asset Original Basis Bonus Depreciation = 100% Remainning Basis Macrs Rate Depreciation Expense New Equipment and Tools (7 years) $1,750,000.00 $1,750,000.00 $0.00 0.00% $0.00 Used Light Duty Trucks( 5 years) $1,500,000.00 $0.00 $1,500,000.00 5.00% $75,000.00 Used Machinery (5 years) $525,000.00 $0.00 $525,000.00 3.57% $18,742.50 Bonus depreciation $1,750,000.00 Total $3,775,000.00 $1,843,742.50 Maximum Cost Recovery Expense Year 2018 Acorn is not eligible for §179 expensing Therefore its maximum §179 amount is reduced to zero. In addition, Acorn must use the mid-quarter convention because it places more than 40 percent of its assets into service in the last quarter ((1,500,000+525,000)/3,775,000 = 54%). Acorn is eligible to take bonus depreciation on its new (not used) assets. Acorn is not eligible for §179 expensing Therefore its maximum §179 amount is reduced to zero. In addition, Acorn must use the mid-quarter convention because it places more than 40 percent of its assets into service in the last quarter ((1,500,000+525,000)/3,775,000 = 54%). Acorn is eligible to take bonus depreciation on its new (not used) assets.

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